Private Equity Firms Add AI Disruption Clauses to Loans
Private equity firms are inserting force majeure-style clauses into buyout loans to protect borrowers from defaults caused by artificial intelligence disruption.
H.I.G. Capital and other private equity firms are introducing force majeure-style clauses into leveraged buyout loans to shield borrowers from defaults triggered by artificial intelligence disruption. These provisions allow companies to suspend lender remedies during AI-driven disruptions, alongside traditional triggers like pandemics, war, and energy price spikes.
H.I.G. Capital successfully integrated this language into a €470 million loan for its majority stake in Terras Group. The clauses officially extend grace periods for missed interest payments, a move advised by lawyer Neel Sachdev of Paul, Weiss, Rifkind, Wharton & Garrison, who has encouraged buyout firms to reduce creditor protections.
Creditors argue these terms undermine lending fundamentals because AI disruption lacks a clear end date. Some lenders have successfully resisted the trend, as seen in Bain Capital's €4.7 billion-equivalent deal for Everllence, a unit of Volkswagen AG, where similar AI-disruption language was blocked. The shift reflects a broader effort by buyout firms to mitigate risks as AI threatens established business models, particularly in the software-as-a-service sector.
