Watchdog Warns On AI Financing
The private credit industry’s growing role in financing the artificial intelligence boom could create sizeable losses if valuations correct sharply, the Financial Stability Board has warned. The global watchdog said private credit funds are becoming increasingly exposed to sectors that are central to the AI buildout, including technology, services and healthcare.
The concern is that private lenders are helping fund data centers and other infrastructure needed for AI growth at a time when asset valuations have risen quickly. If those expectations prove too optimistic, investors in private credit funds could face meaningful credit losses.
AI Deals Take A Larger Share
The FSB report found that AI companies accounted for more than a third of private credit deals in 2025, up from 17% over the previous five years. That rapid increase highlights how important non-bank lenders have become in financing the infrastructure behind artificial intelligence.
Private credit funds lend investor capital directly to companies, outside the traditional banking system. This model has expanded quickly as borrowers seek flexible financing and investors search for higher yields, but the concentration in fast growing sectors raises questions about whether risks are being priced correctly.
Data Centers Create A New Vulnerability
The FSB warned that AI-related loans could become vulnerable if there is a significant shortfall in electricity supply. Power availability is critical for building and operating data centers, and any shortage could delay projects or force cancellations.
That risk matters because the AI investment case depends heavily on the timely expansion of computing capacity. If data centers cannot be delivered as planned, or if operating costs rise sharply, expected returns could fall and borrowers may struggle to service debt.
Oversupply Could Pressure Valuations
The watchdog also warned that AI company valuations could be hit if heavy investment produces an oversupply of data centers. If capacity grows faster than demand for AI services, returns may fall below investor expectations.
For private credit investors, this creates a double risk. Borrowers may face weaker revenue growth than projected, while the assets backing loans could lose value. A sharp correction in AI valuations would therefore test how resilient private credit portfolios really are.
Banks Are Increasingly Exposed
Although private credit sits outside the traditional banking system, the FSB said banks are becoming more connected to the sector. Banks may lend directly to private credit funds, finance riskier fund portfolios or lend to companies that are also borrowing from private credit firms.
Some banks are also forming partnerships with asset managers to participate in private credit deals. This creates channels through which stress in private credit could spread into the regulated financial system, especially if lenders have incomplete information about borrowers.
Recent Failures Raise Due Diligence Concerns
The FSB pointed to the collapse of two US automotive companies backed by private credit, Tricolor and First Brands, as examples of how interconnected corporate credit exposures can become. Both companies later faced fraud allegations, raising questions about lending standards and oversight.
Banks including JP Morgan and Barclays suffered losses linked to Tricolor’s collapse, while UBS and Jefferies reported significant exposures to the failures. For regulators and investors, the lesson is that private credit’s AI expansion may offer attractive returns, but it also brings opacity, concentration risk and the potential for losses if the boom turns into a correction.
