Key Takeaways
- • Business development companies (BDCs) have lent around $115 billion to software firms, roughly a fifth of their total lending and over 80% of their fast-growing technology portfolios, according to a Bank for International Settlements (BIS) analysis.
- • Borrower revenue uncertainty from generative artificial intelligence has not yet affected these loans, and neither BDCs nor their equity investors have priced software exposure differently.
- • Credit spreads have recently narrowed, reducing buffers to absorb losses, while a few large BDCs share exposure to a common pool of borrowers.
- • Low leverage and a predominance of secured lending may limit the potential for spillovers across the sector, per the BIS.
Summary
A Bank for International Settlements publication examines the exposure of business development companies to software firms as generative artificial intelligence raises questions about the revenue outlook of technology borrowers. According to the BIS, BDCs have extended around $115 billion in loans to software companies. That figure represents about one-fifth of the sector's total lending and more than 80% of the technology portfolios, which have been growing rapidly.
The authors find that the revenue uncertainty posed by generative AI has not yet shown up in loan performance for these borrowers. Neither BDCs nor their equity investors appear to have priced software exposure differently from other sectors, a point that the BIS highlights as a potential vulnerability if the AI-driven disruption of software business models intensifies.
The analysis also flags a tightening of credit conditions. Credit spreads have narrowed recently, which reduces the cushion available to absorb losses if borrower performance deteriorates. In addition, a few large BDCs are exposed to a shared pool of borrowers, creating a channel through which stress could be transmitted across vehicles.
The BIS notes, however, that low leverage at BDCs and the predominance of secured lending may limit the scope of any spillovers. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.
The authors find that the revenue uncertainty posed by generative AI has not yet shown up in loan performance for these borrowers. Neither BDCs nor their equity investors appear to have priced software exposure differently from other sectors, a point that the BIS highlights as a potential vulnerability if the AI-driven disruption of software business models intensifies.
The analysis also flags a tightening of credit conditions. Credit spreads have narrowed recently, which reduces the cushion available to absorb losses if borrower performance deteriorates. In addition, a few large BDCs are exposed to a shared pool of borrowers, creating a channel through which stress could be transmitted across vehicles.
The BIS notes, however, that low leverage at BDCs and the predominance of secured lending may limit the scope of any spillovers. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.
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