Several of the world's largest and most prominent hedge funds are warning that risks in the global financial market's private credit sector are mounting.
These warnings have further fuelled debate over how rising interest rates will affect this asset class, against a backdrop of heightened scrutiny of private credit investments amid market fears that AI is upending everything.
The potential impact of AI on traditional software business ecosystems and on the global private credit space with heavy exposure to software stocks is pushing investors to reassess the earnings sustainability of software companies and the repayment capacity of related loans.
With rate expectations and the US Treasury yield curve holding at elevated levels and a wave of debt maturities approaching, private credit is unquestionably facing a dual test of business growth and financing costs.
Tony Yoseloff, Chief Investment Officer of Davidson Kempner Capital Management, said at the 2026 Global Financial Leaders' Investment Summit in Hong Kong on Wednesday that private credit now faces bigger problems than public markets, owing to higher interest rates, slowing corporate growth, and a massive concentration of debt maturing in 2027 and 2028.
Yoseloff said the risk also stems from the fact that roughly one-third of US private credit loans over the past few years flowed into the software industry alongside private equity capital.
"This is a software problem, it is an interest rate problem, and it is an overvaluation problem," he said.
Although the private credit industry has expanded rapidly in recent years, it has also seen several high-profile major failures and endured multiple rounds of redemption pressure, forcing some funds to limit withdrawals.
Recently, rising borrowing costs have intensified concerns further and deepened market worries about excessive exposure to software companies, which face potential AI disruption.
High Rate Trajectory Meets Maturity Cliff: Private Credit Enters a Cash Flow Test
Yields on 10-year and longer-dated US Treasuries remain near historic highs after a sharp climb earlier this year, with the 10-year yield rebounding to about 4.95% on November 3 and easing to around 4.90% during Asian trading on November 4 as election vote counting proceeded.
The significant short-term rebound in bond prices has not eliminated the high financing costs borne by companies, and expectations that the Federal Reserve may return to hiking rates after pausing in October could drive benchmark yields and financing costs even higher.
Wall Street giant Bank of America expects rate hikes of 25 basis points each in December and March next year, while economists at Sumitomo Mitsui Nikko see a single 50 basis point hike in December as a possible scenario, though not their base case.
Hedge fund warnings centre on three pressures: higher interest expenses, slowing growth among borrowing companies, and a concentration of debt maturities in 2027-2028.
The software industry accounts for roughly one-third of US private credit loans, and AI disruption risk further amplifies the sector concentration problem.
Still, top global fund managers are seeking opportunities in loans with solid cash flow, Asian convertible bonds, and selected lower-rated debt, as credit risk repricing widens return dispersion across assets.
Hedge funds' vigilance on credit risk comes alongside selective investment opportunities.
Davidson Kempner is focused on well-performing loans with good cash flow, Indian first-lien secured loans, and Asian convertible bonds, while Farallon sees AI trades and US rate hikes creating opportunities in some CCC-rated debt.
These judgments indicate that high rates, on one hand, increase borrowers' debt servicing pressure, and on the other, may raise the risk compensation available to new investors, pushing fund managers to allocate credit assets more selectively.
John Aylward, Chief Investment Officer of Sona Asset Management, said one warning sign is that the five-year cumulative default rate in the broader syndicated loan market has already exceeded levels seen during the 2008 global financial crisis.
He said the private credit market shares many of the same private equity-backed borrowers and alternative credit managers, except that private credit borrowers are smaller and "inherently riskier."
"For more than a decade, private markets had a wonderful run, a world of low rates and less dramatic change. Now we live in a world of higher rates and extreme change," Aylward said during the same panel discussion.
Investors are monitoring private credit fund risks ever more closely, because companies that borrowed heavily during the low-rate era face refinancing pressure as debt maturities arrive.
Turning to investment opportunities, Yoseloff said Davidson Kempner's investments are split evenly between US financial markets and overseas markets, and the firm sees a very broad range of performing credit opportunities offering mid-teens returns with good cash flow.
He said the firm's liquid strategies have invested more in Asia than in Europe for several consecutive years.
He stressed that Davidson Kempner favours first-lien secured loans in India and finds Asian convertible bonds particularly attractive.
Meanwhile, Nicholas Gioacchini, Chief Investment Officer of Farallon Capital, said that after years of shrinking credit allocations, the fund's credit investment segment has reached a turning point, with AI trades and US rate hikes creating opportunities in CCC-rated debt.
The multi-strategy hedge fund invests in arbitrage, credit, and long-short equity opportunities.
However, Gioacchini warned against using index-level hedges to address systemic risk, because October's stock market correction was more pronounced at the sector level.
He stressed that from Japan to Europe, equity indices are increasingly dominated by AI-related companies, and investors should re-examine the effectiveness of geographic diversification.
"Risk commonality across the world is stronger than it was a few years ago," Gioacchini said in a media interview.
"AI Disrupts Everything" Squeezes Software Moats, Floating-Rate Debt Erodes Debt Servicing Buffer
Multiple large global hedge funds warn that private credit risks are rising.
The potential impact of AI on traditional software business models is prompting investors to reassess software companies' earnings sustainability and the repayment capacity of related loans.
With rate expectations and long-dated Treasury yields holding at elevated levels and a debt maturity peak approaching, private credit faces a dual test of business growth and financing costs.
This round of concern stems from AI moving beyond assisting content generation into corporate workflows such as legal, sales, marketing, and data analysis.
Early this year, Anthropic launched related major AI application plugins led by its Claude Cowork agent, triggering a repricing of traditional software subscription and per-seat charging models; according to media reports in early February this year, the S&P 500 Software and Services Index fell for seven consecutive trading days, shedding about $1 trillion in market value since January 28.
If companies can use AI to accomplish the same tasks with fewer employees and software seats, some software companies' revenue growth and pricing power could come under pressure.
For highly leveraged software borrowers, downward revisions to cash flow expectations combined with a heavy interest burden will also weaken refinancing capacity, transmitting software stock valuation adjustments further into the private credit market.
Floating-rate loans in private credit are typically tied to short-term benchmarks such as SOFR, so policy rate increases directly raise borrowers' interest burdens, while long-term Treasury yields affect refinancing pricing and valuations.
Research from the Boston Fed shows that floating-rate debt accounts for the majority of BDC loan portfolios, and rising interest capitalisation also reflects borrowers' cash pressure.
From a specific operating mechanism perspective, if cutting-edge AI agents such as Claude Cowork, Muse, and ASTRA replace some software functions and depress renewal rates or per-seat revenue, borrowing companies could face both lower profits and higher interest costs.
Falling corporate valuations would in turn weaken refinancing capacity.
Therefore, investment value depends on cash interest coverage, collateral seniority, and default recovery capacity, and cannot be judged solely by high coupon rates; cross-regional allocation also needs to be tested for whether it repeats exposure to the same AI industry cycle.
Comments