Dimon Sounds Alarm on Private Credit—Sounds Like Junk Bonds, Circa 1990

JPM chief points out that these loans have not yet faced a real economic downturn, which high-yield did.

To Jamie Dimon, surging private credit is an accident waiting to happen, as the relatively young asset class has not thus far encountered really hard times. “Frequently, the weaknesses of new products, in this case private credit loans, may only be seen and exposed in bad markets, which private credit loans have not yet faced,” the JPMorgan Chase CEO wrote in his recently released annual report.

The burgeoning entry of retail investors into this field, via mutual funds, disturbs him. “Do you want to give access to retail clients on some of these less liquid products?” he asked at an industry conference Wednesday. “Well, the answer is — probably, but don’t act like there’s no risk with that.” He cautioned that if “investors feel mistreated, they will cry foul, and the government will respond by putting a laser focus on the business.”

Dimon’s warning is reminiscent of the fate that junk bonds faced more than three decades ago: Amid a recession, the popular, high-yielding new asset class got slammed, losing 11% in 1990 as defaults rocketed. The investment bank at the heart of junk’s one-time prominence, Drexel Burnham Lambert, filed for bankruptcy, and Drexel’s high-yield-chief, Michael Milken, ended up in prison. Since then, though, junk bonds have recovered and become an established asset class.

Unlike junk bonds, which are overseen by the Securities and Exchange Commission, private credit investments are securities governed by private contracts and otherwise not regulated. Private credit, or loans made to private companies, are mostly issued by Wall Street firms such as Blackstone Group, Apollo Global Management and KKR, at interest rates higher than better-quality borrowers can get in the bond markets. While these firms are well-capitalized, a private debt crash might hurt them and investors will lack much legal recourse for repayment if the borrowers ultimately default, some fear.

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To be sure, Dimon praised the acumen of Blackstone and the other high-end private credit issuers; JPM itself is raising money to get into the private credit game and capture some of the high returns it offers. But he cautioned that “not all players are that good. And problems in the private credit market caused by the bad players can leak onto the good ones.”

Private debt’s expansion has been astounding, hitting $1.75 trillion globally (mostly in the U.S.) as of mid-2023, up from $280 billion in 2007, PitchBook stats show. Moody’s Investors Service estimates that private debt will reach $2 trillion in 2027. Meanwhile, junk bonds today are a $4.5 trillion market worldwide, according to T. Rowe Price.

The only tough spell private credit has encountered came in 2022, when the Federal Reserve rapidly escalated interest rates. At least a recession did not accompany this, so defaults failed to rise. Although  investors suffered big losses of 18.1% on the S&P 500 and 15.7% on high-grade corporate bonds, private credit investment funds earned 4.2%, per PitchBook.

In 1990, as the high-yield market collapsed, the Cleveland Federal Reserve Bank issued a report concluding: “Considering that the economic forces responsible for creating the market remain in place, it is unlikely that junk bonds will disappear any time soon.” The same can be said for private credit should it hit a rough patch. In fact, similar to junk bonds, many think it is likely to thrive after it weathers some recessionary unpleasantness.

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