Private credit funds are exposed on two fronts: they are financing the massive debt rounds for AI infrastructure and also hold debt for traditional SaaS companies. As AI companies pitch a future where they render SaaS obsolete, it creates instability and default risk across these private credit portfolios.

Unlike the asset-light software era dominated by venture equity, the current AI and defense tech cycle is asset-heavy, requiring massive capital for hardware and infrastructure. This fundamental shift makes private credit a necessary financing tool for growth companies, forcing a mental model change away from Silicon Valley's traditional debt aversion.

The "canary in the coal mine" for private credit isn't SaaS debt but any over-leveraged company. A firm burdened by debt repayments lacks the capital to invest in AI and automation, making it vulnerable to disruption by less-leveraged, more innovative competitors in any industry, not just software.

With fewer traditional credit cycles, the most fertile ground for distressed investing lies in industry-specific downturns caused by technological or policy shifts. These "microcycles" offer opportunities to invest in good companies working through temporary, concentrated disruption.

Public markets favor asset-light models, creating a void for capital-intensive businesses. Private credit fills this gap with an "asset capture" model where they either receive high returns or seize valuable underlying assets upon default, securing a win either way.

The current pressure on direct lending is creating opportunities in other, previously quiet corners of private credit. Strategies like special situations, opportunistic funds, and mezzanine financing will see increased activity as companies needing to refinance or secure more capital find traditional avenues less accommodating.

A significant portion of private credit is concentrated in software companies. Many of these loans were made when rates were low, often with high leverage and weak terms. The emergent threat of AI-driven disruption to their business models now adds a new layer of fundamental risk to this already vulnerable cohort.

Beyond the long-term threat of AI disruption, highly leveraged, lower-quality software companies funded by private credit face a more immediate problem: a $65 billion wall of debt maturing by 2028. They must refinance this debt amid high uncertainty, creating significant near-term risk separate from AI's eventual impact.

The idea that investment-grade companies will abandon liquid public markets is "highly improbable." The real growth for private capital is in asset-based finance (e.g., consumer, aviation loans) as banks change their lending models, creating a multi-trillion dollar opportunity.