The artificial intelligence (AI) transformation is “reshaping the private credit opportunity set”, according to alternative credit manager HPS Investment Partners, which is part of BlackRock.

Historically, the asset class was primarily associated with sponsor-backed leveraged buyouts.

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However, in its latest article ‘AI and private credit: Assessing risk and finding opportunity’, HPS Partners explained that opportunities are increasingly emerging from large corporate borrowers and investment-grade companies seeking flexible financing solutions.

“As private credit continues to mature, managers are participating across a broader range of corporate financing needs, including the infrastructure and capital investment required to support AI development,” the firm noted.

It pointed to the attention attracted by the “massive buildout” of AI infrastructure, including data centres, computing capacity, and supporting technologies.

The alternative credit manager said that while the scale of capital investment has led to comparisons with the telecoms buildout of the late 1990s, there is a key difference.

“Unlike the excess fibre infrastructure that remained unused after the telecom bubble burst, much of today’s AI-related infrastructure already has committed users before construction is complete,” HPS Partners said. 

“For credit investors, however, financing these projects often depends less on predicting future technology outcomes and more on evaluating the strength of counterparties. Many transactions are supported by large hyperscalers and investment-grade corporate borrowers whose credit profiles provide a meaningful layer of protection.”

In the article, HPS Partners attributed the recent volatility in the software sector not only to uncertainty around AI, but also “pre-existing weaknesses in businesses financed during a period of elevated valuations, abundant capital, and excessive leverage”.

Earlier this year, the apparent threat posed to the software sector by AI triggered a broad selloff, prompting a rise in redemption requests to private credit funds.

HPS Partners noted that there is a “significant shift” underway, however, with a “renewed focus” on software companies’ fundamentals.

“During the software boom, many investors prioritised growth over profitability, assuming future scale would eventually generate substantial cash flow,” the firm wrote.

“However, as uncertainty around AI grows, lenders are focusing more closely on whether companies can generate enough cash to repay their debt. This means prioritising visibility into near- and medium-term earnings over aggressive assumptions about how an industry might evolve five years from now.”

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