Multiple Hedge Funds Warn: Software Exposure and High Interest Rates Deliver a Double Blow to Private Credit
nashnova research
Several major hedge funds warned at a Hong Kong summit that AI disruption of the software sector, combined with persistently high interest rates, is compressing borrowers' debt-service capacity from both the revenue and cost sides — with the 2027–2028 maturity wall as the decisive stress test.
What exactly is going wrong in private credit?
Davidson Kempner CIO Tony Yoseloff said private credit faces bigger problems than public markets — higher rates, slower growth, and a massive debt maturity wall in 2027–2028.
Roughly one-third of U.S. private credit loans followed private-equity money into the software sector over recent years. This means → if software comes under pressure, the impact is not isolated — it ripples across the entire private credit pool.
Yoseloff summed it up: "This is a software problem, a rates problem, and an overvaluation problem."
Are default rates already flashing red?
Sona Asset Management CIO John Aylward cited a striking data point: the five-year cumulative default rate in the broader syndicated-loan market — loans issued jointly by multiple banks — has now surpassed the level seen during the 2008 financial crisis.
Private credit holds many of the same PE-backed borrowers, but in smaller, less liquid pools. In plain terms = same borrowers, tighter container, inherently higher risk.
Aylward added: "For over a decade, private markets had a great run in a low-rate, low-volatility world. Now we live in a world of higher rates and extreme volatility."
How does AI end up hurting credit?
If companies use AI to do the same work with fewer employees and fewer software seats — per-user licences that software vendors charge for — some software firms will see revenue growth and pricing power come under direct pressure.
This means → lower cash-flow expectations for software companies → weaker debt-service capacity as borrowers → deteriorating loan quality in the private credit portfolios behind them.
Most private credit uses floating-rate loans pegged to benchmarks like SOFR — the dollar short-term reference rate. When policy rates rise, borrowers' interest bills increase in real time.
Where are rates heading from here?
Bank of America expects the Fed to hike by 25 basis points each in December and next March; SMBC Nikko economists see a single 50-basis-point December hike as a possible scenario, though not their base case.
On November 3, the 10-year U.S. Treasury yield climbed back to roughly 4.95%, near historic highs.
This reflects a market that has fully priced in "higher for longer" — borrowers see no near-term relief on interest costs.
With risk this high, what are fund managers still buying?
Yoseloff said Davidson Kempner favours performing credit with strong cash flows, offering mid-teens returns. The firm also likes Indian first-lien secured loans and Asian convertible bonds; its liquid strategies have invested more in Asia than in Europe for several consecutive years.
Farallon Capital CIO Nicholas Giauque said AI trades and U.S. rate hikes have created opportunities in CCC-rated debt — the lowest-rated tier of high-yield bonds. In plain terms = junk bonds that have fallen far enough now offer higher compensation to those willing to bear the risk.
Giauque also cautioned against using index-level hedges for systemic risk: from Japan to Europe, equity indices are increasingly dominated by AI-related companies, and the effectiveness of geographic diversification needs rethinking.
What is the next critical checkpoint?
Whether the 2027–2028 maturity wall can be refinanced smoothly will be the decisive test of private credit asset quality.
High rates simultaneously burden existing borrowers and raise the risk premium available to new investors. This means → the same high-rate environment is poison for legacy borrowers but opportunity for fresh capital entering now.
This reflects a private credit market entering an accelerating divergence — the gap between companies that can survive refinancing and those that cannot will be widened by rates and AI at the same time.
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