Private credit’s AI problem, and the opportunity
This year has brought a wave of negative headlines around private credit. A large share of the trouble has been in credit advanced to software businesses, many of which now have business models that the rapid development of AI has thrown into question.
Will companies still pay for software on a per-seat basis in five or ten years' time? Perhaps, but almost certainly not in the way they have. When AI can do the work of those seats, or build the software itself, the per-seat model starts to look shaky, and so does some of the debt written against it.
I was at the Milken Conference recently here in LA, and the general thrust from the gods of finance in attendance was much the same. The view was that there clearly are issues in private credit, but this is not a systemic problem, and it is not the makings of another 2008.
So where does that leave us? The Faes & Co Income Fund sits within the broad church of private credit, but at our core, we are an asset-backed lender. Every loan we make is secured by a first mortgage over real property with personal guarantees, and often there is other additional collateral. That makes our lending feel far more resilient than the vast majority of what gets labeled private credit.
It is not that asset-backed lending is immune. Problems have surfaced here too, usually around fraud, with the issues around MFS in the UK being a recent reminder. But a portfolio secured by tangible bricks and mortar is a very different proposition to unsecured, cash-flow lending against a software business that AI might reprice overnight.
We are also seeing this disruption arrive much closer to home. The Financial Times recently ran a piece on borrowers turning to AI to find the right mortgage, rather than going through a traditional mortgage broker. Click here to access the article.
In a corner of finance as heavily regulated and relationship-driven as ours, the idea of an algorithm dispensing that kind of advice would until recently have seemed far-fetched. Yet here we are.
And that brings me to the bigger theme. Every industry is being transformed by AI, including our own, and we are embracing it with how we run our firm.
We have been building our own in-house AI platform, which we call ATLAS (Applied Technology, Lending And Strategy). It lets our team work with a level of efficiency and accuracy, and access data in a way that honestly feels close to magic. Our hope is a simple one: a leaner, sharper organization that ultimately makes better lending decisions and delivers better outcomes for our investors.
AI is going to separate the businesses that embrace it from those that do not. We intend to be firmly in the first camp and believe that the future is exciting.
Christian Faes
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