Private Credit CEO Warns of AI Investment Risks
Co-CEO McKnight warns that private credit investors are undercompensated for risks in AI and data center build-outs as default rates rise.
A co-CEO of a private credit firm, McKnight, warns that investors in the AI and data center build-out are not receiving adequate compensation for their risks. He argues that while equity captures the upside of these investments, credit bears the downside, and winners in the credit space cannot offset losses from losers.
McKnight estimates that private credit default rates are creeping toward 5%, a figure higher than publicly advertised. He attributes this stress to a macro environment pressured by inflation, tariffs, and energy prices. He further suggests that some firms may be using loan amendments to provide flexibility to borrowers, a practice he describes as can kicking.
Despite these warnings, McKnight views current credit volatility as an opportunity to differentiate asset management processes. However, he acknowledges a significant lack of deal flow outside the data center sector. These concerns align with broader industry signals, including warnings from the United States Securities and Exchange Commission regarding valuations and transparency, as well as PIMCO's assertions that default rates are higher than they appear.
