Pimco has indicated in a recent report that investors' growing appetite for artificial intelligence (AI) is causing increasing tensions in the credit market.
The asset manager's multi-asset credit strategist, Lofti Karoui, highlighted that "While sentiment towards the technology sector has notably improved in the equity market, the credit market has shown greater caution, as investors assess the implications of a multi-year debt-financed capex cycle."
According to the firm, a significant shift is also observed in the segment of leveraged loans linked to software companies, an area where a large part of private credit concerns are concentrated. In this regard, Karoui stressed that "Loans issued by portfolio companies of private equity firms have shown significantly worse performance than those issued by unsponsored companies."
According to Pimco's analysis, the market is beginning to question the widening gap between the performance of the stock market and credit in all matters related to AI. For shareholders, "the upside potential justifies the bet," while for debt holders, "the downside risk is real."
In parallel, the debate has opened on the extent to which private equity funds will continue to provide financial support to companies within their portfolios, in an environment marked by intense competition in technological innovation and pressure on their balance sheets.
Along these lines, Pimco's multi-asset credit strategist pointed out that "The market appears to have significantly re-evaluated the extent to which private equity sponsors can, or are willing to, provide liquidity and financial backing to their portfolio companies."