"Private Credit Caught in a Double Bind as AI Boom and Bust Risks Mount: Redemptions Surge, Asset Manager Shares Plunge"

Mounting instability in the private credit market as investors begin withdrawing capital
Rapid AI expansion exposes risk within private loan portfolios
Shares of major private equity managers slide sharply as industry insiders sound alarms

Investor anxiety in the private credit market is intensifying markedly. As the rapid expansion of the artificial intelligence (AI) industry simultaneously raises concerns over a slowdown in the software sector and the potential collapse of an AI bubble, structural vulnerabilities unique to private lending—such as heavy reliance on retail investors—are also coming under renewed scrutiny. The result has been a steady outflow of capital from private loan funds managed by major investment firms.

A Wave of Redemption Requests

According to Bloomberg on the 3rd (local time), Blackstone recently honored redemption requests amounting to 7.9% of shares in its flagship private credit fund, BCRED. To address redemption demands totaling $3.8 billion, the firm raised the quarterly redemption cap from 5% to 7% of the fund’s total shares. In addition, a Blackstone employee fund purchased additional shares to cover redemption requests equivalent to 0.9% of the fund. More than 25 senior leaders invested $150 million in BCRED, while an additional $250 million in company capital was also deployed.

Bloomberg characterized Blackstone’s move as “a signal of growing anxiety across an industry facing large-scale capital outflows.” In fact, the withdrawal trend within the private credit market has been steadily gaining momentum. According to MarketWatch, redemption requests at major private equity managers reached $2.9 billion in the fourth quarter of last year, representing a 200% surge from the previous quarter. Last month, Blue Owl also announced a permanent suspension of redemptions for one of its private lending funds, Blue Owl Capital Corp II (OBDC II). Redemption requests for OBDC II totaled $151 million between January and September last year.

A key factor behind the freeze in investor sentiment toward private credit is the upheaval sweeping the technology industry, particularly around AI. Bloomberg estimates that global technology and AI-related bond issuance will reach $990 billion this year, up about 28% from $710 billion last year. Much of this capital is expected to be directed toward AI infrastructure development. Morgan Stanley likewise projects that global funding demand for AI infrastructure will reach $1.5 trillion this year. Capital-intensive competition to secure leadership in AI data centers, semiconductors, and power infrastructure is entering full swing.

Escalating AI-Driven Risk

The irony is that private equity investors fear the very growth of the AI sector. If software companies lose out to AI-focused competitors, private credit funds that have extended substantial loans to them could suffer heavy losses. Information technology and software companies typically represent a large share of private credit portfolios. In the case of Blackstone’s BCRED, software-related lending accounts for 25% of the portfolio. In a recent report, UBS Group warned that rapid changes in the corporate landscape driven by AI could push default rates in the private credit market as high as 15%, well above historical norms.

Conversely, the bursting of a potential AI bubble could also impose heavy losses on private funds. Large amounts of private loan capital have already been poured into AI infrastructure projects such as data centers. Meta, for example, secured a $29 billion private capital package last August to finance construction of the Hyperion AI data center in Louisiana, including $26 billion in loans and $3 billion in equity. The deal involved PIMCO, Blue Owl, and Morgan Stanley. CoreWeave also raised about $7.5 billion in private loans in May 2024 to expand its GPU cloud infrastructure for AI computing. The transaction was led by Blackstone with Magnetar as co-investor, while Carlyle, BlackRock, and DigitalBridge also joined the lending syndicate.

Some industry observers argue that the possibility of an AI bubble collapse is no longer a remote scenario. The AI sector is reportedly approaching limits in technological advancement. Even astronomical levels of investment are struggling to deliver dramatic improvements in model performance. As returns diminish relative to capital input, the profit-generation structure inevitably faces pressure. In a report published last November, JPMorgan estimated that achieving a 10% return on projected AI investment by 2030 would require an additional $650 billion in annual revenue. That figure is roughly double Google’s annual revenue. In August last year, the Massachusetts Institute of Technology’s research group known as the NANDA Initiative concluded that 95% of companies investing in AI were generating no profits at all.

Structural Uncertainty Resurfaces

Structural risks inherent in private lending are also amplifying investor unease. Private equity managers have increasingly turned their attention to wealthy individual investors with substantial cash reserves, in addition to traditional funding sources such as pension funds and insurance companies. Products targeting retail investors—such as Blue Owl’s OBDC II—have proliferated, fueling rapid growth in assets under management (AUM).

The issue lies in the investment behavior of individual investors. Private lending operates on the premise that investors will tolerate high volatility and risk until maturity. Retail investors accustomed to trading stocks and bonds, however, often prefer to liquidate their positions quickly when market conditions deteriorate. In other words, when retail investors allocate capital to private credit, they are more likely to demand immediate redemption rather than absorb volatility during periods of stress. Because loan assets extended by private funds cannot be readily converted into cash in the short term, a wave of redemption requests could force managers to sell assets at steep discounts or impose redemption restrictions, trapping them in what industry observers describe as a “liquidity trap.”

Amid these layered risks, shares of private equity managers have been sliding sharply. Blue Owl (-32.92%), Blackstone (-30.15%), Apollo Global Management (-26.96%), and Ares Management (-32.27%) have all seen their stock prices plunge by roughly 30% this year alone. Warning voices are also emerging from within the industry. JPMorgan CEO Jamie Dimon—often dubbed the “emperor of Wall Street”—previously remarked on weaknesses in the private credit market, stating that “if you see one cockroach, there are probably more behind it.” Jeffrey Gundlach, CEO of DoubleLine Capital and widely known as the “new bond king,” has likewise criticized private lending as “garbage loans.”