Jamie Dimon's comments on private credit are not an ominous warning of a catastrophe, as some may have suggested.
JP Morgan Private Bank's analysts have released a note titled "Private credit: Promising or problematic?", offering a balanced view on the potential benefits and risks of the private credit market.
The Promising Side of Private Credit
The analysts argue that fears of private credit causing a systemic financial crisis are overstated. Despite its rapid growth, private credit assets under management (AUM) stand at about $1.2 trillion, which is roughly 9% of all corporate borrowing. This size is significant but not large enough to threaten the broader economy or destabilize the banking system.
Private credit, especially senior direct lending, can deliver strong returns and show resilience during downturns due to higher starting yields (~10%) and seniority in the capital structure, providing a cushion against losses. A severe economic downturn would be required to see negative total returns, as default rates would need to exceed 6% with very low recovery rates to offset gains.
JP Morgan itself has committed $50 billion to private credit recently, illustrating confidence in responsible management and opportunities in the space.
The Risks of Private Credit
The analysts echo JPMorgan CEO Jamie Dimon's warnings about private credit risks such as opaque ratings, aggressive leverage, looser covenants, and illiquid vehicles with long lockups of five to ten years, which can amplify stresses if losses mount.
Dimon has compared some private credit practices to those that contributed to the 2008 financial crisis, warning of potential systemic risks if the sector is mismanaged or grows in a "happy-go-lucky" fashion untested by downturns.
However, the analysts emphasize that Dimon’s critical remarks should not be viewed as a doomsday prophecy but rather as a call for responsible practices and diversification across different private credit segments beyond just senior direct lending, including asset-backed credit, opportunistic credit, and secondaries.
A Call for Caution and Diversification
In summary, JP Morgan Private Bank’s analysts see private credit as a promising asset class with strong return potential under prudent management, while recognizing significant risks related to market practices and economic cycles. They advocate for diversification and caution, aligning with CEO Dimon's warnings but maintaining a constructive stance on the sector’s opportunities.
The global private credit fundraising increased by 60% in Q1 2025, indicating growing interest in the market. However, this growth should be met with careful consideration and responsible practices to mitigate potential risks.
Meanwhile, a US senator has written letters to ratings agencies regarding reports of inflating private credit ratings, adding another layer of scrutiny to the sector.
As the private credit market continues to evolve, it is crucial for all participants to prioritize transparency, disciplined underwriting, and prudent regulation to ensure sustainable growth and minimize systemic risks.
Investing in private credit can deliver strong returns due to higher starting yields and seniority in the capital structure, making it a promising asset class. However, the risks related to opaque ratings, aggressive leverage, looser covenants, and illiquid vehicles with long lockups should not be overlooked. Therefore, a call for caution and diversification across different private credit segments is necessary for responsible management and sustainable growth in the sector.
