According to informed sources, Morgan Stanley has tightened some of its lending to private credit funds after writing down portions of loans within its investment portfolio. This marks the latest sign of stress in the $1.8 trillion industry.

The sources added that the loans that were written down were extended to software companies, which have been among the largest borrowers driving growth in the private credit market. In recent weeks, the software sector has drawn increased attention as investors express concerns about the impact of artificial intelligence.

Wall Street banks, including Morgan Stanley, act as partner lenders to private credit funds, providing financing secured by the loans held by these funds. A decline in the value of such assets reduces the amount banks can lend to these funds, adding pressure to an industry already facing challenges. The sector is contending with significant withdrawals by retail investors, who are alarmed by renewed scrutiny of underwriting standards and developments in the AI field.

Media reports on Tuesday indicated that Cliffwater LLC is the latest private credit firm to face redemption requests exceeding 7% for its flagship fund. This follows similar investor withdrawal demands at funds managed by BlackRock, Blackstone, and Blue Owl Capital.

A person familiar with Morgan Stanley's decision described the move as a precautionary adjustment, noting that it is not the first time the bank has reassessed asset valuations.

As the largest bank in the United States, Morgan Stanley differs from its peers by retaining the right to revalue private credit assets at any time. Other banks typically require a triggering event, such as a missed payment, before adjusting valuations. Executives in the private credit industry stated they have not observed similar actions by other banks.

Morgan Stanley CEO Jamie Dimon told investors at the bank's leveraged finance conference last week that lenders are becoming more cautious when extending credit backed by software-related assets.

Morgan Stanley declined to comment. Following the reports, U.S. stock index futures trimmed their gains. S&P 500 futures, which had been up 0.5%, saw their advance narrow to 0.3%.

In October, Dimon warned that more "problems" would emerge in the once-booming but opaque private credit market, where asset prices are generally not disclosed publicly. Since then, some investors in the sector have dismissed concerns about rising default rates and the potential for broader risk contagion.

Wall Street banks have been among the most steadfast providers of capital to the private credit industry. A Moody's Investors Service report in October, citing Federal Reserve Board data, indicated that bank lending to credit funds totaled approximately $300 billion as of late June. The report also showed that Morgan Stanley's exposure to private credit stood at $22.2 billion.

Following the financial crisis, banks faced increasingly stringent regulations and shifted much of the risk associated with lending directly to high-yield and unrated borrowers to private credit firms. Private credit offers banks a safer way to benefit from the rapid growth of this asset class.

However, this model has recently shown signs of strain following the collapse of UK mortgage lender Market Financial Solutions Ltd.

MFS, which had secured over £2 billion ($2.7 billion) in financing from investors including Barclays and Apollo Global Management's Atlas SP Partners, described itself as one of the UK's largest providers of short-term bridging loans before declaring bankruptcy on February 25.