AI is igniting private credit, and this time it's more complicated than in 2008.
AI disruptions are pushing the private credit industry to the brink of a systemic crisis. Concentrated software exposure, surging redemption waves, and inflated valuations together form a wall of risks that could collapse at any moment—its fall would affect banks, insurance companies, and the entire public credit market.
The Federal Reserve has begun inquiries into banks' risk exposure to private credit, and the US Treasury is simultaneously surveying the insurance industry. This is the strongest signal so far from regulators, indicating their efforts to assess the potential scale of this crisis spreading into the broader financial system.
Meanwhile, according to The Wall Street Journal, major banks including JPMorgan are joining forces with S&P Global to prepare the launch of a private credit credit default swap index product (CDX Financials), allowing investors to take long or short positions on this $3 trillion+ industry with less capital.
From redemption stampedes to regulatory intervention, from major institutions short positioning to the emergence of new derivative tools, the intensity and complexity of the private credit crisis is accelerating—yet the real impact may still be ahead.
Redemption Wave Pushes the Industry to the Edge of Collapse
There have been signs of crisis. After initial market turmoil triggered by the "reciprocal tariff" sell-off, bad news kept coming. In summer 2025, First Brands and Tricolor collapsed in succession, sparking panic-driven searches for more "cockroaches" by the market, and causing shares of listed business development companies (BDCs) to plunge.
In 2026, software companies became the main holdings in private credit funds, and their vulnerability to AI led to the second, more destructive round of BDC and private credit share slumps. Nearly all targets in this sector saw deep losses in 2026, with losses compared to early 2025 already realized.
Redemption pressure is exploding. Reports say 41% of investors in Blue Owl’s Technology Income fund have submitted redemption requests, and Blue Owl Credit Income has seen 22% follow suit.
Leading institutions including Carlyle, Ares, Apollo, Oaktree, and KKR have all surpassed the legal quarterly redemption limit of 5%. Blackstone even had to use $150 million of its own staff's money to fill redemption gaps in its $82 billion private credit fund BCRE.
Former Point72 fund manager David Rosen had predicted this. In a letter to investors, he wrote: Once a fund starts proportional redemption cuts, "the redemption queue for the entire sector will swell rapidly, and since funds cannot liquidate assets, liquidity will dry up severely."
AI Disruption and Debt Maturity Trigger a Double Explosion
The roots of the crisis lie in structural weaknesses on the asset side. According to Barclays, Software/SaaS loans are the largest single industry exposure in BDC holdings, with their share rising steadily since 2019. The leapfrog progress of AI tools in the past 18 months has turned this concentration risk from implicit to explicit.
Adding to the challenge is a wave of looming debt maturities. Over $200 billion in high-yield bonds and leveraged loan tech debt will mature before 2028, much of it tied to companies held by the private market.
PitchBook LCD data shows that about $20.6 billion in software-related debt held by BDCs matures in 2028, with another $21.4 billion following in the next 12 months.
Capital markets advisor Lincoln International notes that about 6.4% of direct lender borrowers paid interest in the fourth quarter by rolling over new debt to cover cash flow pressures—up sharply from 2.5% at the end of 2021.
Barclays analysis says that in the entire BDC system, only a 21% drop in median asset value would trigger a breach of the asset coverage ratio test threshold—which would mean systemic collapse of the BDC structure.
Opacity and Falsified Valuations Sow a Crisis of Trust
The acceleration of the crisis is closely tied to longstanding opacity issues in the sector. Scott Goodwin of Diameter Capital summarizes six aspects:
SaaS exposure is deliberately hidden or mislabeled in some portfolios;
Direct lending managers lack portfolio construction awareness;
Valuation inconsistencies and false reporting between funds;
Complex leveraged tools like secondary liens, joint ventures, and direct CLO equity systematically underestimate real leverage;
About $250 billion in direct loan assets are in "semi-liquid" products, while underlying assets have no actual liquidity;
LPs face the prisoner's dilemma—those who don’t redeem may end up with a pile of bad debts.
Blackstone's rapid markdown of a private loan’s value from face value to zero earlier this year shocked the market; Saba Capital founder Boaz Weinstein has repeatedly questioned the real proportion of genuinely senior loans (1L) in private credit portfolios as exaggerated.
UBS predicted in its February report that under a "fast, severe AI impact" scenario, private credit default rates could surge as high as 15%, warning that "the most urgent risk is of sector-specific shocks triggering cascading defaults," and ultimately spreading to life insurers linked to private equity and heavily allocated to private credit and structured products.
CDS New Tools Enter, Hedging and Shorting Demand Resonates
Against this backdrop, the emergence of new derivatives tools signals that the market is preparing for another round of risk repricing.
JPMorgan, together with Bank of America, Barclays, Deutsche Bank, Goldman Sachs, is working with S&P Global to launch a credit default swap index called CDX Financials. The index includes private credit funds under Apollo, Ares, and Blackstone, comprising a total of 12%, with the rest including insurance companies, regional banks, and credit card companies.
Nicholas Godec, Head of Fixed Income Products at S&P Dow Jones Indices, stated: "This will be the first credit default swap product linked to private credit, and now is the right time to launch it."
Barclays Credit Strategy Head Dominique Toublan noted: "Private credit is growing rapidly, financial system participants are building exposure by many means, and there is real market demand for this sort of product."
The launch of this product is quite similar to the surge in RMBS derivatives before the 2008 financial crisis—when private credit reaches deep into banks, insurance companies, and the whole financial system, hedging tools reflect both market demand and risk spillover.
Some hedge funds have previously tried to short stocks and bonds of private credit companies to establish short positions, but the process was cumbersome and costly; this new index will greatly lower the threshold.
Regulators Step In, Systemic Risks Surface
The logic of the private credit crisis inevitably entangles with the deep interconnectedness of the financial system.
The Federal Reserve has begun inquiries into major banks' risk exposure to private credit, focusing on the scale of debt that credit funds obtain from banks. In a pro-cyclical environment, such debt can amplify returns; in a counter-cyclical environment, it would transmit the risk of shrinking loan collateral directly onto balance sheets.
Meanwhile, the US Treasury is also surveying the insurance sector, planning to meet with state insurance regulators to discuss emerging risks and the industry outlook.
The Treasury's concerns are not unfounded. According to IMF data, private credit accounts for 35% of US insurance company (especially life insurer) investments.
Over the past decade, insurance companies have continually funded non-bank lenders, who then concentrate those funds in software companies and package them in various complex structures. If the value of these software assets evaporates rapidly under AI impact, losses will directly strike the insurance capital system holding America’s senior citizen savings.
UBS points out that if the private credit crisis is not contained, the spillover into the public credit market will be almost instantaneous, with the worst scenario triggering a global financial crisis and even the best scenario forcing the Federal Reserve to restart large-scale quantitative easing.
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