The $3 trillion private credit market, heavily invested in software companies, is experiencing stress due to fears that AI will disrupt traditional software business models. This has led to increased redemption requests and stock price drops for firms managing private credit, reflecting a broader repricing of risk. However, private credit's inherent high-yield, high-volatility nature means such stress is expected and historically compensated. While AI disruption poses underwriting challenges and potential defaults, recovery rates and loan coupons may mitigate losses, suggesting the market is being tested rather than failing. Retail investors should assess portfolio exposures carefully, as not all software companies or loans face equal AI risk, and some may even benefit from AI integration. The current selloff may create long-term investment opportunities amid mispricing driven by sentiment rather than fundamentals.
