Foreign media: Due to AI concerns lowering valuations, banks are increasing the borrowing costs for private equity credit funds

How AI Concerns Trigger Valuation Pressure on Private Credit Funds?

【Global Network Financial News】According to Reuters, citing three informed sources, due to increasing market doubts about the valuation of some investments in private credit funds, U.S. banks are raising the interest rates on some loans to these funds. This change may begin to impact the funds’ returns.

Two sources said that since the end of last year, banks have increased the interest rates required for these funds (including commercial development companies) as their main sources of debt. At that time, concerns about lending standards and the performance of software companies invested by the funds were intensifying.

The report states that tightening lending conditions could affect the funds’ investment capacity and daily operational financing. Morningstar analyst Sean Dunlop said, “Any interest cost will directly impact the private credit fund’s net interest income and internal rate of return.” The internal rate of return (IRR) represents the expected annualized profit rate of the investment.

In recent months, private credit has been closely watched due to the risk exposure from the potentially disruptive impact of artificial intelligence on the software industry. Some investors have redeemed their shares in related investment vehicles, and the prices of some listed exchange-traded funds have suffered heavy losses.

A source told Reuters that borrowing costs across the entire market are rising, and private credit companies are also charging higher fees to absorb the increased financing costs. Private credit funds use leverage to increase the amount of capital available for investment in other assets, so when leverage costs rise, their profit margins shrink. (Wen Hui)