As the artificial intelligence landscape accelerates, a fresh report by the Financial Stability Board (FSB) raises alarms about the burgeoning reliance on private credit for financing datacentres and essential infrastructure. With the AI industry now accounting for a staggering one-third of private credit arrangements in 2025—up from only 17% in the preceding five years—investors and financial regulators are on high alert for potential pitfalls in this rapidly evolving market.
The Rise of Private Credit in AI
The FSB’s findings underscore a striking trend where tech, healthcare, and services sectors are turning to private lenders in unprecedented numbers. AI firms, in particular, have become significant players in this arena, leveraging private credit to support their growing infrastructure needs. The report highlights that this concentrated borrowing behaviour could expose private credit funds to unique risks, leaving them vulnerable to industry-specific shocks.
In a world where electricity is the lifeblood of datacentres, the FSB warns that any substantial dip in electricity supply could lead to project delays or cancellations, resulting in considerable credit losses. The rapid appreciation in asset valuations within the AI sector could also falter if an oversupply of datacentres surpasses actual demand, leaving investors with disappointing returns.
Risks Lurking Beneath the Surface
While private credit lenders tout their ability to offer tailored loan solutions and better risk monitoring, the FSB remains sceptical. Companies seeking private credit typically possess lower credit scores and higher debt levels than those relying on traditional banks. This disparity raises concerns about the quality of loans being disbursed, as evidenced by mass withdrawals from certain private credit funds in response to growing apprehensions about their stability.
These dynamics have prompted some private credit firms to cap withdrawals, highlighting the precarious nature of this financing model. As banks increasingly collaborate with asset managers on private credit deals, they too are unwittingly tethered to an opaque environment where lenders may not have comprehensive insights into borrowers’ financial health.
Corporate Failures and the Ripple Effect
Recent corporate collapses serve as stark reminders of the risks involved. The FSB pointed to the downfall of two private credit-backed US automotive companies, Tricolor and First Brands, both of which are now embroiled in fraud allegations. These incidents have raised questions about the diligence of private credit lenders in assessing the viability of their borrowers.
Major banks, including JP Morgan and Barclays, have reported significant losses linked to Tricolor’s bankruptcy, while firms like UBS and Jefferies have also disclosed considerable exposure to these failures. The FSB’s report poignantly illustrates how interconnected banks can be within the corporate credit ecosystem, raising concerns about the broader implications for financial stability.
Why it Matters
The surge in private credit financing for the AI sector highlights the delicate balance between innovation and risk management. As AI companies continue to flourish, their reliance on private credit could pose significant threats not just to individual investors, but also to the financial system as a whole. Vigilance is essential; as the FSB indicates, a sharp correction in asset valuations could have cascading effects, impacting not only the tech landscape but the global economy. As we embrace the future of technology, understanding and mitigating these risks will be paramount to sustaining growth and stability in the burgeoning AI realm.
