AI Disruption Is Redrawing the Private Credit Playbook
Artificial intelligence is no longer just creating investment opportunities; it is reshaping how private credit lenders assess risk.
According to PitchBook analysts, AI disruption has become one of the defining themes in leveraged finance this year, prompting lenders to rethink long-standing assumptions about software companies while shifting capital toward industries viewed as more insulated from rapid technological change.
The result is a growing divide between borrowers perceived as AI winners and those seen as increasingly vulnerable.
“AI disruption seems to be still lingering around and probably will be for the next couple of quarters at the least,” Kenny Tang, Senior Director, Head of U.S. Credit Research at PitchBook, said during a market outlook presentation on Thursday.
The impact is already showing up in loan issuance. Software, one of the private credit market’s favorite sectors, has seen a dramatic collapse in lender appetite. Sill said software accounted for nearly 30% of new broadly syndicated loan issuance at the end of 2025. That figure has fallen to roughly 9% so far in 2026 as investors question how quickly AI could disrupt existing business models.
Capital Moves to AI-Resistant Sectors
The weakness extends beyond new issuance. Existing software loans have also sold off sharply in secondary markets. While bids for non-software loans have largely held around 96 cents on the dollar, software loans have dropped from roughly 95 cents at the end of 2025 to about 85 cents on the dollar.
“I don’t see AI disruption going away in the second half of this year,” Tang said, suggesting pricing pressure could persist.
As lenders retreat from software, capital is flowing elsewhere. Healthcare has overtaken software as the leading sector for new loan issuance, followed by professional and business services. In private credit specifically, healthcare now leads direct lending activity, while services, leasing, and industrial businesses have attracted growing interest from lenders seeking companies viewed as more resistant to AI disruption.
Private Credit Gets More Selective
Abby Latour, managing editor of PitchBook U.S. private credit team, said portfolio managers are actively reducing software exposure in favor of businesses they believe are less likely to be displaced by generative AI.
“Companies that appear insulated from disruption by AI are in demand,” Latour said. The shift has also fueled lending activity in adjacent markets, including life sciences, venture debt, asset-based lending and equipment finance.
The sector rotation comes as private credit activity has weakened more broadly.
PitchBook research noted that direct lending deal volume and transaction counts fell to their lowest levels in three years during the second quarter as private equity firms slowed acquisitions amid geopolitical uncertainty and a difficult exit environment. Large leveraged buyouts have become particularly scarce, with PitchBook tracking no direct lending-backed LBO financings above $2 billion since early March.
Instead, stronger borrowers increasingly have access to both syndicated loan markets and private credit providers, while weaker companies are facing fewer refinancing options.
That bifurcation is becoming more pronounced across credit markets. Tang noted that investors are increasingly favoring higher-rated borrowers over lower-quality credits. Spreads on B-minus-rated loans have widened significantly relative to stronger credits, reflecting growing caution among lenders.
Latour expects that trend to continue throughout the second half of the year, predicting wider spreads for more complex transactions and a more lender-friendly market as investors become increasingly selective.
Stress is also beginning to emerge within existing portfolios. Researchers pointed to rising payment-in-kind interest, amend-and-extend transactions, distressed loan marks and non-accruals as signs that pressure is building across parts of the private credit market.
One high-profile example is software company Medallia, where a lender group led by Blackstone, Apollo and FSKKR assumed ownership after the company defaulted on debt backing its leveraged buyout. The lenders have since recapitalized the business with fresh capital while attempting to reposition it for future growth.
AI Creates New Lending Opportunities
Despite the pressure on traditional software lending, PitchBook believes AI will continue creating new opportunities for private credit.
Rather than financing software businesses themselves, lenders are increasingly exploring hybrid financing structures tied to AI infrastructure projects, including the physical buildout required to support expanding AI capacity.
For now, AI is changing not only where capital flows, but also how credit risk is measured. Borrowers once viewed as core private credit investments are facing tougher scrutiny, while sectors considered more resilient to technological disruption are becoming the market’s new favorites.
Photo: Shutterstock