Private credit funds lent a lot of money to software companies at the beginning of the decade when they were being snapped up in a rush of expensive buyout deals. Now many of these tech businesses are braced for disruption by artificial intelligence, and some might end up defaulting on that debt. I fear private credit firms won’t recover as much of their loans as they’d hoped.

Lenders expect a certain amount of trouble when backing riskier midsized companies. Losses depend on the number of defaults in their portfolio as well as how much value they’re able to claw back if there’s a problem. While the number of these businesses defaulting on their borrowing isn’t high by historic standards yet, creditors need to worry about the second part of the equation.

In years past, lenders relied on their ability to recoup much of the value of a soured loan, meaning even a largeish number of defaults could be managed. Things might be different this time. A private credit loan made to a generic small or midsized software company might recover 20-40 cents on the dollar, according to comments attributed to Apollo Global Management Inc.’s John Zito in the Wall Street Journal this month.

He could be right. If enterprise-software business models are made obsolete by AI, the underlying assets might retain little value.

Of course, these AI-related losses will take time to materialize but it’s already looking questionable that private credit — where either one fund or a select group of them lend directly to a company — will conserve more value than broadly syndicated debt arranged by banks. “The thing to worry about in direct lending isn’t the default rates, it’s the implied recovery rates,” Eric Rosenthal, head of default research at industry intelligence provider KBRA DLD, tells me.

The next big wave of defaults will probably be different in at least two respects to prior periods of credit stress. For one, it will be one of the first big tests for the relatively........

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