The private credit market has been quieter than expected. And while that may seem like good news, it’s actually not.

Private credit’s next hurdle is going to be surviving the AI-led software rout.

Features that used to take quarters to build are becoming simple AI prompts. As a result, the “stickiness” lenders used to underwrite is getting harder to prove.

Simply said, software loans are coming under pressure because of AI disruption, causing things to get much worse for the private credit market.

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The private credit market has been quieter than expected.

Even after some major blowups like the First Brands bankruptcy late last year, there hasn’t been any panic or major upheaval in private credit or private equity.

Part of that calm is understandable. In a higher-rate world, lenders have been collecting double-digit yields. Investors aren’t in a rush to complain about that.

That said, the worst is yet to come. Private credit’s next major hurdle is going to be surviving the AI-led software rout.

AI threatens to undo as much as a decade of software investments, potentially leaving private lenders stuck collecting pennies.

One lender has completely hit the brakes.

Marathon Asset Management is a major private credit lender. And as of June 2025, the company stopped lending to software companies altogether.

The reason is simple: AI is moving so fast that what seems like a good, safe deal today could be worthless tomorrow.

Even for software companies investing in AI, there’s no guarantee those companies will have an advantage tomorrow.

Bruce Richards, Marathon’s CEO, framed it as a “blockbuster moment” for software—a wave where business models either adapt quickly or get left behind with near-zero recovery rates for lenders.

In software, the problem is duration. A five-year loan assumes the borrower’s product stays relevant long enough to keep renewing contracts and paying interest. But AI is compressing that window fast.

Features that used to take quarters to build are becoming simple prompts. The “stickiness” lenders used to underwrite is getting harder to prove.

And that could spell disaster for creditors.

Bloomberg recently highlighted how AI is starting to hurt software loans.

Software loans make up roughly 12% of Bloomberg’s leveraged loan index, and those loans were among the worst performing in January.

While software loans largely matched overall loan returns in all of 2025, they lost 2.5% in January alone while the rest of the market was roughly flat.

Software loans are coming under pressure because of AI disruption. And UBS expects things to get much worse.

In its ”aggressive disruption” scenario, UBS sees US high-yield defaults reaching 4%. In private credit, defaults would jump to 13%. That’s Armageddon territory for private credit.

UBS also estimates that as much as 35% of the $1.7 trillion private credit market is exposed to AI disruption risk, driven heavily by technology and services. In other words, this isn’t a niche problem confined to a handful of bad deals. Creditors spent years giving cheap debt to software companies—and that system is ready to implode.

It’s not time to panic right now, but this is a good reminder that all is not well in private credit.

When private credit looks calm after a blowup, people assume the system proved its strength. In reality, this is a feature of the private markets.

AI is only going to make things harder on the crowded software market, and there’s not much private lenders can do. They’ve already made the loans. Now they have to deal with the consequences.

There are plenty of publicly traded private creditors. And investors should stay far away no matter how “cheap” they might get.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research