Billions wiped off ‘shadow banks’ as AI threatens wave of defaults

Billions have been wiped off “shadow banks” over fears artificial intelligence (AI) will trigger loan defaults at software companies.Major US lenders who provide loans to the tech sector have shed more than $2bn (£1.4bn) in value this week over concerns that AI tools will squeeze borrowers’ balance sheets, making them unable to repay their debts.Software stocks have been battered this week after Anthropic, a $350bn Silicon Valley AI lab, unveiled a new legal and accounting tool for its Claude chatbot which threatens to replace existing software services.Reaction has so far been confined to software stocks, but there are growing fears from investors that the $2tn shadow banking sector is badly exposed because of the billions they have lent to the tech sector.The S&P Business Development Companies index, which tracks 44 private credit funds, has shed about $2.2bn in value since Monday over fears of a software sector meltdown.Hercules Capital, a private credit fund managing $5.5bn, was the worst hit with shares plunging 8.4pc over the period. It lends to dozens of software and tech groups which could be disrupted AI.Blue Owl Capital, one of the biggest players in the private credit sector, has also fared badly with its share price down by 6.9pc. Blue Owl Technology Finance, another tech-focused fund managed by Blue Owl, also fell by 6.6pc.The fund boasts of having “a strategic focus on software”, which has alarmed investors.Exposure to AI disruptionShadow banking has been a source of growing unease after the collapse of two major US companies last year – Tricolor and First Brands – led to concerns over lax lending standards.In the wake of the scandal, Jamie Dimon, the JP Morgan chief, predicted many more “cockroaches” were lurking inside private credit funds.According to UBS, AI disruption could cause loan defaults to rise to 13pc in private credit.It added that between a quarter and a third of the private credit universe was exposed to disruption from AI, driven mainly by firms tied to the technology services sector.Anthropic’s new tool is a plugin for its current Claude Cowork application which can be used for legal, marketing, finance, data analysis or customer support.Unlike chatbots, these new AI “agents” can do tasks with minimal prompts and create documents and presentations by drawing on data stored on the computer automatically.Software is ‘dead’In the UK, shares have plunged in companies that develop mundane tools for accounting, legal services, data entry or digital marketing, such as SAP, Sage and Relx.Fears that the sector might not be able to provide the returns it once did, predate the release of Anthropic’s newest tool, with fears growing in tandem with the advances in artificial intelligence.Addressing a gathering in Toronto last fall, John Zito, the co-president of Apollo Asset Management, the giant US investor, warned that the major threat for investors in private companies wasn’t tariffs, rising interest rates or inflation, but “the real risk”, he said, software is “dead”.Isaac Kim, who previously led the technology private equity business at Elliot Investment Management, echoed those concerns in a recent LinkedIn post.“Technology private equity, in its current form, is dead,” he said. “In large parts of enterprise software ... AI is replacing legacy systems – 5pc to 10pc growth rates are no longer assured.”The S&P Business Development Companies index tracks firms which pool private credit loans. The index serves as a popular way to track the performance of the private credit direct lending space.The sector as a whole hit multi-year lows this week as investors have surveyed the level of exposure to software in their portfolios.Last week The Telegraph revealed how the private credit industry was being quizzed by the City watchdog over fears that poor lending practices could lead to a financial system meltdown.