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Jamie Dimon made headlines this week when he was reported as saying “there could be hell to pay” in the burgeoning private credit market from the tandem risks of bad actors and poorly educated retail clients.
While that phrase makes for a typical clickable Dimon doomsaying headline, the JPMorgan CEO also said this in his comments on private credit: “There may be problems there. I don’t think it’s systemic.”
But we should back up for a second.
You may have heard the term “private credit” thrown around over the past few years. It’s the counterpart of the public, tradable credit market. Firms like Blackstone (BX), Yahoo Finance parent company Apollo (APO), and KKR (KKR) raise money for a fund, just as they would for a private equity vehicle. In this case, instead of buying stock in companies, they lend that money out, either directly to companies or for real estate projects or other types of specialty loans.
The International Monetary Fund estimated the size of the private credit market at $2.1 trillion in 2023. That compares with the total size of the fixed-income market — which includes public credit (like corporate bonds), sovereign debt, and other types of loans — at well north of $100 trillion.
So what are the “problems” Dimon refers to?
Private credit doesn’t trade like public corporate bonds, for example. So it’s less liquid and its pricing is less transparent. It’s fairly new, so there’s not a useful history of default trends. Private credit funds typically have lockup periods, so if a retail investor — Dimon cites a “granny” who might get into these vehicles — wants her money back sooner, she might raise a fuss, which could result in, say, attention from Washington or an attempted run on the fund.
That IMF analysis from April does a good job of laying out the broader risks: “Valuation is infrequent, credit quality isn’t always clear or easy to assess, and it’s hard to understand how systemic risks may be building given the less than clear interconnections between private credit funds, private equity firms, commercial banks, and investors.”
The IMF doesn’t think those risks rise to the level of being systemic right now, like we saw during the Great Financial Crisis. But it’s something to watch.
One of the characteristics of the subprime market that set off that crisis was how broadly subprime loans were held — from big insurers to banks and asset managers. Private credit is the hot new asset class, and money has been pouring into it from pension funds, for example.
A former credit trader friend of mine says that while private credit is being marketed as safer, it’s not necessarily so: “It doesn’t matter how you dress it up. It’s credit, it’s systemic, and any large losses would be a problem.” With private credit, “there’s this false sense of security that the underwriting is better, and it’s not.”
And one important note: Even as Dimon discussed the potential risks, his bank of course competes with private credit in its lending operations. What’s more, JPMorgan has reportedly set aside $10 billion for direct lending and is contemplating an acquisition in the space.
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