Private credit has been one of the fastest-growing corners of finance over the past decade plus.
It surged after the 2008 financial crisis, when banks pulled back from middle-market lending and left a gap for private lenders to fill.
Today the U.S. private credit market is sitting at about $1.3 trillion.
Private credit was attractive because it offered higher yields and more control. And for a while, it even looked like a safer way to generate income.
But the foundation of private credit is starting to look a lot less stable today. Because pressure is building inside the very loans that made this market so attractive in the first place.
This week’s chart shows exactly where it’s happening.
Cracks In the Foundation
Take a look at this chart.
Image: https://x.com/BoringBiz_/status/2035382444287791412
At first glance, the data might look reassuring.
After all, private credit only has about 21% exposure to software and technology, compared to roughly 50% in U.S. equities.
That suggests private credit should be less vulnerable if tech runs into trouble.
But this comparison is misleading because it treats all “tech exposure” as if it’s the same.
In public markets, that 50% exposure is concentrated in a small group of companies driving the AI boom. Tech giants like NVIDIA (Nasdaq: NVDA), Microsoft (Nasdaq: MSFT) and Alphabet (Nasdaq: GOOGL) are benefiting directly from rising demand for compute, infrastructure and AI services.
But private credit sits on the other side of that trade.
Which means that 21% exposure is largely tied to mid-sized software companies, leveraged SaaS businesses and companies that raised debt when interest rates were near zero and borrowing was cheap.
These companies don’t need a catastrophic downturn to run into trouble. They just need conditions to get a little worse.
And that’s what’s happening right now.
For years, software was one of the safest areas to lend into because it offers recurring revenue, high margins and predictable cash flow. That made it easier to justify higher levels of debt.
But that equation has changed.
Interest rates are staying higher for longer, raising the cost of servicing debt.
At the same time, AI is starting to reshape the software business itself. Which means tools that once required full teams can now be built or replaced faster and cheaper. And features that used to justify premium pricing are becoming easier to replicate.
This puts pressure on growth and pricing at the same time.
And that’s why the foundation is cracking.
Cash flow is tightening just as debt costs are rising. So lenders are having to make concessions to keep borrowers afloat. Instead of getting paid in cash, they’re allowing companies to delay payments by adding interest onto their loans.
And with fewer companies being bought or taken public, it’s becoming harder for investors to exit these deals.
Now, this doesn’t look like a full-blown crisis. Yet.
Most loans are still set up in a relatively conservative way, with lenders first in line to get paid if something goes wrong.
But that structure doesn’t eliminate risk.
It just determines who gets paid first when things go south.
Here’s My Take
This chart highlights a mismatch that’s easy to miss at first glance.
In public markets, investors are concentrated in the companies driving the AI boom. But in private credit, lenders are exposed to the companies being forced to adapt to it.
That worked when capital was cheap and growth covered the risk.
But in today’s environment, with higher rates and rising competition from AI, that cushion is starting to disappear.
And that’s exactly where the foundation of private credit is starting to give.
Regards,
Ian KingChief Strategist, Banyan Hill Publishing
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