Dear Income Traders,

Goldman Sachs just had one of its worst stretches in recent memory. Wall Street blamed geopolitics. Tariffs. The usual suspects. But here's the thing: the real problem isn't sitting on a trading desk. It's buried inside 1.7 trillion dollars worth of private credit, and a huge chunk of it is pointed at companies that artificial intelligence might make worthless.

Let me explain, because this one matters.

Where Did All That Money Go?

After the 2008 financial crisis, regulators put the handcuffs on traditional banks. Dodd-Frank rules made it harder for the big lenders to take the kinds of risks they used to take. So the lending business didn't disappear. It just moved into the shadows. Private credit firms, business development companies, and alternative lenders stepped in to fill the gap. And they grew. Fast.

The private credit market hit 1.7 trillion dollars by the end of 2025. That's up from about 310 billion in 2010. Morgan Stanley estimates it could reach five trillion by 2029. Now, here's where it gets interesting. According to S&P, software and technology companies account for roughly 25 percent of private credit portfolios. UBS puts the number even higher, estimating that 25 to 35 percent of private credit faces elevated AI disruption risk. Software makes up about 17 percent of business development company investments by deal count, second only to commercial services.

And those software companies? They're asset light. That's finance speak for "there's nothing to grab if things go wrong." No factories. No equipment. No inventory sitting in a warehouse. Just code on a server. If the business fails, creditors are left holding an empty bag.

AI Just Kicked the Legs Out From Under the Table

The thesis behind lending to software companies was beautiful. Sticky recurring revenue. High margins. Predictable cash flows. Customers who couldn't switch. Private equity firms loved it so much they bought over 1,900 software companies between 2015 and 2025 in deals worth more than 440 billion dollars.

But every single one of those assumptions is now being stress tested by artificial intelligence. The cost of AI compute has dropped roughly 50 times over the past couple of years. New tools let people with zero coding experience build software that used to cost millions to develop. The iShares Software ETF dropped 15 percent in January alone, its worst monthly decline since October 2008.

Apollo, one of the sharpest firms in credit, cut its software exposure nearly in half during 2025, from about 20 percent to roughly 10 percent. When Apollo is de-risking that aggressively from a sector, pay attention. Even Blackstone's Jon Gray said the biggest risk isn't the bubble popping. It's the disruption risk. "What happens when industries change overnight," he said, comparing it to what happened to the Yellow Pages when the internet arrived.

Former Goldman Sachs CEO Lloyd Blankfein is now ringing alarm bells too, warning that the financial system appears to be inching toward another potential problem, with everyday Americans exposed through their retirement accounts and wealth management portfolios. The assets are hard to analyze, may feature hidden leverage, and can become tough to sell.

Why This Matters to You

This isn't just a Wall Street problem. If you own shares of the big alternative asset managers, if you hold financial sector ETFs, or if you're watching the XLF bounce around like it can't decide what it wants to be, this is the undercurrent driving that confusion. The banks that were supposed to profit from taking these private software companies public through IPOs are watching that pipeline dry up. Goldman, KKR, Blue Owl, Ares: they've all felt the pressure.

Is this big enough to cause real contagion? Maybe. Maybe not. But 1.7 trillion dollars concentrated in an asset class that just discovered its biggest borrower category might be obsolete is not something to ignore. The disruption happening in software isn't slowing down. It's accelerating. And the private credit market built its house on the assumption that software companies would just keep cashing those subscription checks forever.

That assumption just broke.

Here for a good time AND a long time,

Hans