Concerns over inflation, defaults, and AI-driven disruption in software have fueled recent stress in private credit markets, prompting Goldman Sachs Research to speak with leading credit CEOs, who see AI as a driver of greater dispersion and volatility rather than broad market disruption across private and leveraged loan markets.
“While software is the largest sector in private credit, it’s also the largest in the broadly syndicated leveraged loan market. So, if AI does disintermediate a significant share of software firms, both the public and private markets would be impacted,” Goldman Sachs chief credit strategist Amanda Lynam said.
Private credit is well-positioned to deploy its dry powder, she added. Public markets, however, are likely to remain volatile, potentially driving more capital into opportunistic credit strategies.
Lynam also emphasized that AI-driven disruption has long been on the radar of private credit managers, though its pace may be accelerating faster than expected.
“I largely view the software exposure in both private and liquid markets as a catalyst for additional dispersion, not widespread market disruption,” she added.
Current Private Credit Stresses ‘Don’t Pose Systemic Risk’
While Oaktree CEO Howard Marks, Ares’ CEO Michael Arougheti, Marathon’s CEO Bruce Richards and Goldman’s Lynam all agreed that the current private credit stresses “don’t pose systemic risk,” they disagree on the near-to-medium term outlook, the report stated.
Arougheti echoed similar views, saying he isn’t particularly worried about software exposure and that the concerns appear “overdone.”
Meanwhile, Richards expects a software correction to be more painful. 23% of the private market is software loans, which Richards says is an “excessive figure” by any standard. He expects that we will see “incredibly high software sector default rates in 2027, 2028, and 2029, with peak defaults of 15% and double-digit default rates in each of those years and software loan loss rates in the 70-100% range.”
Despite concerns about software, Richards said he expects direct lending to emerge “bigger and stronger than ever” as the correction will lead to a return of manager discipline.
Marks remains cautious, expecting retail investors to act more carefully as weaknesses in publicly sold private asset funds become visible. However, he believes that going through a full credit cycle could ultimately create a stronger, healthier environment for direct lending and private credit overall.
The experts argue these risks are not systemic, noting that stress is concentrated in a small segment (non-traded BDCs), with limited liquidity and low leverage reducing the chance of a broader crisis. The experts also highlight generally healthy credit fundamentals and believe recent defaults are not large enough to signal major trouble.
Overall, despite near-term uncertainty and differing views, the executives believe that private credit will remain resilient and continue growing, potentially emerging stronger after current challenges.
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