Private Credit To VC-Backed Startups Hit $68.8 Billion. AI Is Two-Thirds Of Every Dollar.
The WSJ's Wednesday Markets section reports that venture-debt firms are expanding aggressively beyond their software-industry core. Total deal value for venture-backed startup financing rose almost 12% to $68.8 billion across more than 1,000 transactions in 2025, up from $61.5 billion in 2024 (joint report from Runway Growth Capital and PitchBook).
Two structural shifts in the data:
- AI dominates the VC equity side. Of $321.6 billion in VC investment across 17,000 deals in 2025, half of the money flowed into just 0.05% of transactions. AI deals were nearly 64% of total deal value. That concentration is unprecedented.
- Venture debt is rotating away from software. Pinegrove Credit Partners now allocates roughly 45% of its capital to defense, aerospace, and hardware. Its software lending has dropped from a historical 40-50% of deals to roughly 20%.
Why Software Lending Is Shrinking
The article quotes Blue Owl Capital co-CEO Marc Lipschultz: "There are certain parts of software that are vulnerable." The fear is that AI will disrupt traditional Software-as-a-Service businesses that rely on recurring revenue — the very revenue stream venture-debt lenders use to underwrite their loans.
The data backs up the worry. Investors in two of Blue Owl's biggest private-credit funds asked to pull out $5.4 billion in Q1 2026. The firm capped redemptions at 5%. Business development companies (BDCs) and interval funds with heavy software exposure are seeing meaningful outflows.
Why Defense / Aerospace / Hardware Is Growing
The lending rotation maps cleanly onto the geopolitical backdrop. Russia / Ukraine, Iran / Strait of Hormuz, China / Taiwan, and now Russia / Baltics all push defense procurement to multi-year highs. Aerospace OEMs are running multi-year backlogs. Hardware (semiconductors, robotics, autonomous systems) is benefiting from CHIPS Act capex.
This isn't just venture-debt color — it's a tell about where institutional capital sees durable cash flow over the next 5-10 years.
The Read-Through To Our Book
The Pinegrove allocation shift (defense / aerospace / hardware over software) reinforces three things we're already long:
Defense overweight. Lockheed Martin (LMT), RTX (RTX), General Dynamics (GD), Northrop Grumman (NOC), L3Harris (LHX). The lending data tells you that sophisticated capital is moving in the same direction.
Aerospace. Boeing (BA) on the recovery trade, GE Aerospace (GE) on the engine cycle, Howmet Aerospace (HWM) on the airframe-fastener cycle, TransDigm (TDG) on the aftermarket monopoly.
AI hardware. Nvidia (NVDA), AMD, Taiwan Semiconductor (TSM), Qualcomm (QCOM, added today), Vertiv (VRT), Bloom Energy (BE), Arista Networks (ANET).
The thing we are not long: traditional Software-as-a-Service names without a defensible AI moat. Salesforce (CRM) and ServiceNow (NOW) have the AI moat and are in the book. Workday (WDAY), HubSpot (HUBS), and the long tail of SMB-SaaS we deliberately don't own.
For Clients Asking About Private Credit Funds
If you hold private-credit funds in a 401(k), 403(b), or taxable account, look at the exposure. The funds heavily weighted to software-backed venture debt are the ones with the redemption pressure. The funds with diversified exposure (defense, hardware, healthcare, real assets) are still performing. We'll review specific allocations in any Q2 portfolio review.