UBS warns private credit-fueled AI boom risks overheating
A significant shift is underway in how the burgeoning artificial intelligence sector is financed, with private credit lenders rapidly emerging as a crucial, albeit potentially risky, source of capital. This influx of “deep pockets” from private debt markets is now drawing scrutiny from financial institutions like UBS Global Research, which warns that the AI boom, fueled by this alternative financing, might be teetering on the edge of overheating.
Traditionally, private credit has served a niche role, primarily extending loans to smaller, often heavily indebted companies that struggle to access conventional bank financing or public markets. However, in a notable evolution, this asset class is increasingly attracting large-scale technology firms. These tech giants, with their voracious and escalating capital requirements for AI development and infrastructure, are finding private debt an appealing avenue to secure the necessary funds, often valuing its flexibility and speed over traditional financing routes.
The scale of this shift is considerable. According to estimates from UBS, the total private debt deployed into the technology sector reached approximately $450 billion by early 2025. This represents a substantial $100 billion increase in just 12 months, underscoring the rapid acceleration of this trend. Even more striking is the growth within business development companies (BDCs)—specialized funds that provide direct corporate loans. Their lending to the tech sector has nearly doubled, soaring from $80 billion to $150 billion over the same period, as detailed in a recent bank report.
While this surge of capital undoubtedly fuels innovation and accelerates AI development, UBS’s cautionary stance highlights potential systemic risks. The concern of “overheating” typically implies a market where valuations become inflated, risks are underpriced, and the rapid pace of investment outstrips sustainable growth or returns. For private credit, this could mean an accumulation of less transparent, potentially riskier loans within the portfolios of funds that are less regulated than traditional banks. Should the AI growth trajectory falter, or if the underlying economic conditions shift, the rapid expansion in private debt could expose lenders and, by extension, the broader financial system to unforeseen vulnerabilities, particularly given the often opaque nature of these private transactions compared to public market instruments.