Private Debt News Weekly Issue #64: AI Bubble Warnings, Fox Hedge Wizardry, and India's Credit Rush
Credit pours into AI infrastructure while executives warn of dot-com parallels and profit failures
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Private credit is simultaneously funding the AI boom and facing warnings about its sustainability. Credit investors deployed over $22 billion for Vantage Data Centers while OpenAI's Sam Altman acknowledged parallels to the dot-com bubble, noting "someone's gonna get burned." MIT research shows 95% of generative AI projects have failed to yield any profit, yet private lenders continue pouring capital into infrastructure with 20-30 year financing for technology that may look completely different in five years.
Apollo's complex Fox Hedge structure reveals new levels of financial engineering, bundling $5 billion in diverse assets into 40-year bonds for its own insurer Athene. Meanwhile, HPS and Apollo snapped up $2.2 billion of stuck LBO debt that banks couldn't syndicate after April's tariff volatility. Fitch reported the US private credit default rate dipped to 5.2% in July, but PIK usage continues rising with BDCs reaching 6% PIK income, the highest since 2020.
Apollo plans to double its India assets to $4 billion as global firms rush into the subcontinent's expanding private credit market. Neuberger Berman launched its first interval fund focused on asset-based credit, joining the retail distribution push as institutional fundraising moderates.
The industry is expanding into new geographies and structures while core markets show both opportunity and stress signals.
Key Market Themes
1. AI Investment Frenzy Meets Bubble Warnings
Credit investors are pouring billions into AI infrastructure deals despite growing concerns about sustainability. JPMorgan and Mitsubishi UFJ are leading a $22+ billion loan for Vantage Data Centers, while Meta's $29 billion data center financing from Pimco and Blue Owl represents the largest private credit deals on record.
OpenAI CEO Sam Altman acknowledged parallels to the dot-com bubble, warning that "someone's gonna get burned" on startup valuations. MIT research indicates 95% of generative AI projects have failed to generate profit, while UBS estimates private credit has $450 billion deployed in the technology sector, up $100 billion year-over-year.
Citigroup's Daniel Sorid noted "it's natural for credit investors to think back to the early 2000s" when telecom companies overbuilt and over-borrowed. Data center deals involve 20-30 year financing for technology with uncertain five-year visibility, according to S&P's Ruth Yang.
The Risk Assessment
AI infrastructure financing creates massive deployment opportunities but carries significant technology obsolescence risk. The combination of long-term financing commitments and rapid technological change mirrors historical infrastructure booms that resulted in substantial losses for lenders.
2. Apollo's Fox Hedge Pushes Financial Engineering Limits
Apollo created Fox Hedge, a $5 billion fund that bundles diverse assets from its own funds into 40-year bonds with investment-grade ratings. The structure was designed by Advanced Credit Solutions, a Luxembourg-based firm, to give Apollo's insurer Athene private credit returns while reducing regulatory capital requirements.
Fox Hedge bonds offer 6.05% coupons on senior notes and up to 8.32% on floating-rate tranches. Athene purchased approximately 86% of the issuance, according to Moody's estimates. The structure allows insurers to cut capital charges by a factor of 10 compared to direct loan holdings.
Federal Reserve researchers note the structure exploits "loopholes stemming from rating agency methodologies and accounting standards." Moody's calculates that roughly one-third of US life insurers' $6 trillion in assets is tied to private credit, with the share rising rapidly.
Market Implications
Complex structured products enable insurers to increase private credit exposure while managing regulatory capital, but create valuation challenges and concentration risks. The 40-year maturity requires ongoing asset replacement as underlying collateral matures, introducing execution risk.
3. India Becomes Global Private Credit Battleground
Apollo plans to double its India assets from $2 billion to $4 billion over three years as the country's private credit market explodes. Bank lending to non-banking finance grew just 6.7% in 2024, down from 15% in 2023, creating opportunities for alternative lenders.
Global competitors including Cerberus, Davidson Kempner, and Ares are rapidly expanding in India. Shapoorji Pallonji Group completed a $3.4 billion private financing in May, the largest ever in India. Apollo will double its investment headcount to 50 people over three years, focusing on credit and supply-chain finance.
Infrastructure opportunities emerge from the government's $1 trillion infrastructure push over five years. Apollo's Matthew Michelini noted that "traditional banks cannot fund the entire economic growth story" in the world's fastest-growing major economy.
Strategic Context
India's expanding economy and regulatory constraints on traditional lenders create substantial opportunities for international private credit firms. However, intensifying competition and potential weakening of lending standards require careful market positioning and risk management.
4. Interval Funds Drive Retail Distribution Strategy
Neuberger Berman launched its first private credit interval fund focused on asset-based credit, with over 80% of investments in receivables, consumer loans, and hard assets. The fund offers quarterly liquidity through repurchase offers with an 18-month weighted average duration.
At least 25 interval funds launched this year from firms including TCW, Apollo, Capital Group, and KKR as institutional fundraising slows. Neuberger's specialty finance unit manages over $4 billion in assets and closed its third fund with $1.6 billion in February.
The firm announced a $1 billion purchase of retail and medical point-of-sale loans from ClarityPay, demonstrating the scale of consumer finance opportunities driving interval fund creation.
Distribution Impact
Interval funds provide a middle ground between daily liquidity ETFs and fully illiquid private funds, attracting retail capital while managing redemption risks. Success depends on appropriate asset-liability matching and investor education about liquidity limitations.
5. Secondaries Market Shows Continued Growth
JPMorgan's Andrew Carter departed after leading the bank's private credit secondaries strategy, highlighting personnel movement as the sector expands. Secondary market volume hit a record $102 billion in H1 2025, with private credit expected to reach $17 billion this year from $10 billion last year.
Coller Capital announced a record fundraising for its private credit platform, while Pantheon collected $2.2 billion for its latest opportunistic credit secondaries fund, triple its initial target. The expansion reflects aging credit funds and demand for yield among institutional investors.
Industry Development
Secondaries growth provides liquidity solutions for investors while creating new revenue streams for managers. The sector's rapid expansion indicates fund maturation and LP portfolio management needs as private credit markets evolve.
6. Default Rates Moderate Despite PIK Concerns
Fitch reported the US private credit default rate dipped to 5.2% in July from 5.5% in June, though remaining elevated compared to 4.6% in December 2024. Interest payment deferrals and PIK conversions drove 70% of the 63 unique defaults during the trailing twelve months.
Healthcare providers had the highest number of unique defaulters with eleven recorded, followed by industrials and pharmaceuticals with five each. UBS noted PIK income in BDCs reached 6% in Q2, the highest level since 2020.
Credit Reality
Default rate moderation provides some relief, but PIK usage concentration in specific sectors indicates underlying cash flow stress. The prevalence of payment deferrals over bankruptcies suggests extend-and-pretend behavior that may delay but not eliminate credit problems.
7. Major Buyout Financing Revives Stuck Deals
HPS and Apollo purchased $2.2 billion of ABC Technologies buyout debt that banks couldn't syndicate after April's tariff volatility. The financing includes a $1.6 billion private credit loan led by HPS and a $675 million last-out term loan, allowing Citigroup and JPMorgan to clear stuck positions.
Soho House agreed to a $2.7 billion take-private deal with Apollo providing over $700 million in debt financing plus $150 million in equity. The transaction demonstrates private credit's role in complex buyout structures combining debt and equity.
Competitive Advantage
Private credit's flexibility enables completion of transactions that traditional syndicated markets cannot execute, particularly during periods of market volatility or sector-specific concerns. This capability positions private lenders as preferred financing partners for complex deals.
Deals of Note
Vantage Data Centers: $22B+ loan led by JPMorgan and Mitsubishi UFJ for AI infrastructure
ABC Technologies: $2.2B private credit package from HPS and Apollo for stuck LBO debt
Soho House: $2.7B take-private deal with $700M+ debt financing from Apollo
Apollo Fox Hedge: $5B structured product bundling diverse assets into 40-year bonds
India Expansion: Apollo targeting $4B assets with doubled investment team
Forward Outlook
AI infrastructure financing continues despite bubble warnings and profit concerns
Complex structured products expand as insurers seek higher yields with regulatory efficiency
Interval funds proliferate as retail distribution channels for private credit strategies
Secondaries market growth accelerates with fund maturation and liquidity needs
Default rates stabilize while PIK usage concentration indicates sector-specific stress
Private credit flexibility proves valuable for complex transactions during market volatility
Final Takeaway
Private credit is simultaneously pushing into its most complex and ambitious phase while confronting fundamental questions about sustainability and risk management. Apollo's Fox Hedge represents financial engineering innovation that maximizes regulatory arbitrage, while AI infrastructure deals show the industry's appetite for transformational technology financing despite 95% project failure rates.
India's expansion opportunities and interval fund proliferation demonstrate geographic and demographic diversification as traditional institutional fundraising moderates. HPS and Apollo's $2.2 billion acquisition of stuck bank debt proves private credit's value during market disruptions, while PIK usage at 6% indicates underlying borrower stress continues despite moderating default rates.
The industry's $450 billion tech sector exposure grows rapidly even as Sam Altman warns of dot-com bubble parallels. Complex structured products, long-term AI infrastructure commitments, and regulatory arbitrage schemes create opportunities but also systemic risks that may not manifest for years.
Private credit's evolution from middle-market lending to mainstream financial infrastructure brings both massive scale opportunities and proportional responsibilities. Success will depend on maintaining credit discipline while developing new capabilities across technology sectors, international markets, and retail distribution channels.
Market leadership increasingly belongs to firms that can execute complex structures, manage diverse geographies, and adapt to changing technology landscapes while preserving the relationship focus and risk management that originally defined private credit's value proposition.