The AI Gold Rush and the Private Credit Bubble: A Recipe for Disaster?
There’s something almost poetic about the way the AI boom has captured the world’s imagination. It’s the modern-day gold rush, with companies and investors alike scrambling to stake their claim in the next big thing. But what happens when the rush is fueled by a financial system that operates in the shadows? That’s the question the Financial Stability Board (FSB) is asking—and their recent report on private credit should have us all paying attention.
The Private Credit Boom: A Double-Edged Sword
Personally, I think the rise of private credit is one of the most underreported stories of the past decade. It’s not just about AI; it’s about how the financial landscape has shifted dramatically. Private credit firms have become the go-to lenders for sectors like healthcare, services, and tech, offering flexibility that traditional banks can’t match. But here’s the catch: this flexibility comes at a cost.
What makes this particularly fascinating is how private credit has become the lifeblood of the AI industry. In 2025, AI firms accounted for over a third of private credit deals, up from just 17% in the previous five years. That’s a staggering shift, and it’s easy to see why. Building datacentres—the backbone of AI—requires massive upfront capital. Private lenders are stepping in where banks fear to tread, but at what risk?
The Fragile Foundations of AI’s Rise
One thing that immediately stands out is the FSB’s warning about a potential correction in AI asset valuations. If you take a step back and think about it, the AI boom is built on the assumption that demand will keep growing indefinitely. But what if it doesn’t? What if we end up with an oversupply of datacentres and a market that can’t absorb them? The FSB suggests this could lead to “sizeable credit losses” for private credit investors.
From my perspective, this raises a deeper question: Are we overestimating the pace of AI adoption? The hype around AI is undeniable, but history is littered with examples of technologies that failed to live up to their promise. If AI’s growth stalls, the ripple effects could be catastrophic, especially for lenders who’ve bet big on the sector.
The Hidden Risks of Opaque Lending
What many people don’t realize is how opaque the private credit market really is. Unlike traditional banks, private lenders operate outside the regulated financial system. This lack of oversight has already led to some high-profile failures, like the collapse of Tricolor and First Brands, two private credit-backed automotive companies. Both were later hit with fraud allegations, leaving lenders—and their banking partners—holding the bag.
This isn’t just a problem for private credit firms; it’s a problem for the entire financial system. Traditional banks are increasingly exposed to private credit, either through direct lending or partnerships with asset managers. The FSB warns that this integration creates a “web of exposures” that could amplify shocks in the event of a crisis.
The Electricity Wildcard
A detail that I find especially interesting is the FSB’s mention of electricity supply as a critical risk factor for AI projects. Datacentres are energy hogs, and any disruption in power supply could derail entire projects. This isn’t just a theoretical risk; it’s a very real concern in a world grappling with energy transitions and climate change.
What this really suggests is that the AI boom is far more fragile than it appears. It’s not just about algorithms and data; it’s about physical infrastructure and the resources needed to sustain it. If we’re not careful, we could end up with a system that’s vulnerable to the smallest of shocks.
The Broader Implications: A System on the Brink?
If you ask me, the private credit-AI nexus is a microcosm of a much larger issue: the financial system’s growing reliance on unregulated, high-risk lending. Private credit firms may offer flexibility, but they also operate in a gray area where risks are often underestimated. The FSB’s report is a wake-up call, but will anyone listen?
What this really suggests is that we’re playing with fire. The AI boom has all the hallmarks of a bubble, and private credit is the fuel that’s keeping it inflated. When—not if—the bubble bursts, the fallout could be far-reaching. Banks, investors, and even governments could find themselves on the hook for losses they never saw coming.
Final Thoughts: A Cautionary Tale
In my opinion, the private credit-AI story is a cautionary tale about the dangers of unchecked optimism. We’re so enamored with the promise of AI that we’ve overlooked the risks lurking beneath the surface. The FSB’s report is a timely reminder that every boom has its bust, and this one could be particularly painful.
If you take a step back and think about it, the real question isn’t whether the AI boom will end—it’s how much damage it will leave in its wake. As someone who’s watched financial bubbles burst before, I can’t shake the feeling that we’re headed for trouble. The only question is whether we’ll learn from it—or repeat the same mistakes all over again.
