Brookfield Says Private Credit’s AI Woes Aren’t a Systemic Threat — But Risks Still Rattle Markets

Concerns over the impact of artificial intelligence on the private credit market have intensified in recent weeks, with analysts warning that AI-driven disruption to borrowers could strain credit portfolios and push up default rates. But according to Brookfield Corp. CEO Bruce Flatt, those fears are overstated — at least when it comes to broader financial system risk.

In an interview on Bloomberg Television, Flatt sought to calm market jitters, emphasizing that while some private credit lenders face stress related to technology exposures, the industry’s overall footprint is too small to trigger a systemic crisis. “Private credit is very small and software loans are even smaller,” he said. “This is not a systemic situation.”

What’s Driving the Concern?

Private credit — a sprawling, loosely regulated market where institutional and non-bank lenders extend loans to mid-sized companies — has ballooned over the past decade. As banks retrenched from traditional lending after the global financial crisis, private lenders stepped in, filling the gap with higher-yield loans often backed by corporate cash flow rather than hard assets. Total outstanding private credit in the United States and Europe now runs into the trillions.

Much of the recent anxiety centers on exposure to software and technology companies, where artificial intelligence is seen both as a transformative opportunity and a potential threat. As AI tools accelerate automation and reshape product demand, some investors worry that established software business models could be disrupted, making it harder for borrowers in that space to service their debt.

Analysts at firms such as UBS Group AG have even suggested worst-case default scenarios that would see private credit losses spike dramatically if AI drives rapid corporate upheaval. In one such projection, default rates in private credit could soar as high as 14–15% in an aggressive AI disruption scenario — a significant jump from current low single-digit readings.

Market Reaction vs. Macro Reality

These worst-case scenarios — while useful for stress testing — do not reflect base-case forecasts, and they have been amplified by media coverage and market commentary. Indeed, many lenders and investors argue that the threat is being exaggerated.

Flatt’s comments reflect this view. He highlighted that private credit’s overall share of total global credit markets is relatively modest, and that its structures differ significantly from traditional banking sectors where systemic risk can propagate more easily. For example, private lenders do not rely on deposit funding, and their loans are typically held by institutional investors rather than retail depositors, reducing the likelihood of sudden withdrawals or runs.

Still, markets have reacted to the looming uncertainty. Shares of alternative asset firms with large credit platforms have been volatile, and some private credit managers have taken defensive positioning in recent weeks. Analysts point to this as evidence that investor sentiment — rather than immediate credit deterioration — is currently driving much of the price action.

Divergent Views on the Risk Landscape

The contrast between Flatt’s reassurance and bearish projections highlights a broader debate within financial markets about AI’s impact on credit risk. On one side are pessimists pointing to rising valuations in sectors now facing technological disruption and the inherent opacity of private credit portfolios. On the other side are more measured voices arguing that fundamentals remain intact for most borrowers, and that any stress — if it materializes — would likely be concentrated rather than systemic.

Take, for instance, the UBS strategists’ warning: while they acknowledge the potential for elevated default rates in a severe scenario, they also categorize it as a tail risk rather than an expected outcome. Their broader projections for leveraged loans and high-yield bonds under the same scenario are also elevated, but not catastrophic, suggesting a market repricing rather than a collapse.

Structural Resilience and Sector Nuances

One reason many analysts believe broader contagion is unlikely stems from structural features of private credit. Loans are often senior secured, giving lenders priority claims on collateral, and they are held by sophisticated institutional investors — such as pension funds, insurers, and asset managers — who are arguably better equipped to absorb losses than retail depositors.

Furthermore, private credit is not traded daily in public markets. Its illiquid nature means valuations adjust more slowly, which can damp volatility in the short term, though it also raises questions about true price discovery — a factor that some critics cite as a vulnerability in turbulent times.

Despite these protective features, stress in parts of the market has already surfaced. For example, some private debt vehicles have seen restrictions on redemptions or reduced liquidity provisions as managers seek to preserve capital amid heightened uncertainty. Such moves underscore the reality that parts of the private credit ecosystem are feeling pressure, even if the broader system is not on the brink of crisis.

The Road Ahead for Investors

For now, Flatt’s message may be the prevailing one among long-term investors: private credit faces challenges, but they do not amount to systemic risk. That said, scrutiny will almost certainly continue.

Investors are increasingly focusing on underwriting quality, borrower diversification, and stress testing across portfolios. Discussions about greater transparency and risk controls are also gaining traction as institutional allocators reassess how they price and monitor credit exposure in an AI-influenced economy.

The broader debate over AI’s role in reshaping industries — from software to services — is far from settled. What is clear, however, is that private credit is now a focal point in that discussion, and how lenders navigate this period of uncertainty could have lasting implications for debt markets and institutional investors alike.