The Other Leverage in Software and AI (tomtunguz.com)

Recent developments in the software and AI sectors have caused significant disruptions in financial markets, particularly impacting leveraged companies and their funding structures. Shares of major players like Blue Owl, Ares, and KKR plummeted over 9% after UBS reported that 35% of Business Development Companies (BDCs) face potential AI disruptions. With AI technologies increasingly capable of automating tasks traditionally performed by software, such as legal research and coding, the recurring revenue on which these companies rely is under threat. The implications are severe as increased AI competition could lead to a cascading effect on the stability of corporate debts tied to software revenues. Moreover, the financial landscape is evolving, with heavy reliance on debt financing for tech infrastructure projects. Companies like Oracle and CoreWeave are raising substantial funds largely through borrowed capital, which raises concerns given the fragility of high leverage in a rapidly changing tech environment. The private credit market could inject $750 billion into AI infrastructure by 2030, but pressures are mounting from both operational challenges—like GPU lifespan limitations—and market performance variability, as seen in BlackRock's substantial writedown. This volatility emphasizes the precarious balance in leveraging debt against the uncertain backdrop of AI's rapid advancement, suggesting that any fluctuations in market expectations could lead to pronounced financial repercussions.