The same artificial intelligence powering the data center boom is now reading the fine print on $1.8 trillion in private loans — and it doesn't like what it sees.
The Summary
- AI tools are exposing hidden risks in private credit, spooking investors in a market that doubled in size since 2020
- Guggenheim's executive chair signals concern the market could "crack" as scrutiny intensifies
- Private credit thrived in opacity; machine analysis is turning on the lights
The Signal
Private credit spent a decade selling a simple story: higher returns with less volatility than public markets. Pension funds and endowments poured in. The asset class swelled to $1.8 trillion. But that growth happened in a low-rate environment where nobody looked too hard at the underlying loans. Now rates are higher, exits are harder, and AI is reading every covenant in every credit agreement.
The timing is revealing. Alan Schwartz warned about private credit fragility at the same Milken conference where everyone else was celebrating the AI infrastructure boom. He runs Guggenheim Partners, a firm with $295 billion under management. When someone at that level uses the word "crack," listen.
"AI is exposing hidden risks that are scaring off some investors, pointing to a possible reckoning."
Here's what changed: private credit succeeded partly because it was hard to value. No public market price. No daily mark. Quarterly valuations based on models. That opacity was a feature for institutional allocators who wanted smooth return profiles. But new AI analysis tools can now:
- Parse covenant structures across thousands of loans
- Flag correlation risks that manual analysis missed
- Spot deteriorating credit quality in real time
- Compare private credit terms to public alternatives
The irony is thick. The same AI wave driving power demand and data center construction — the infrastructure story Schwartz sees as fundamentally sound — is also the force revealing that many private credit deals were priced for a world that no longer exists.
The Implication
If you're an LP in private credit funds, ask your GP for the AI stress test. Not the one they ran internally. The one an independent third party ran on your portfolio's covenant packages and underlying collateral. If they can't produce it, someone else will.
For everyone else: this is what transparency looks like when it arrives uninvited. Private credit marketed itself on information asymmetry. AI just made that asymmetry a liability instead of an edge. Watch for funds that embrace the new scrutiny versus those that fight it. That split will tell you who actually underwrote well and who just rode the wave.