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JPMorgan Chase has clamped down on its lending to private credit groups, with bankers looking to cut risk as concerns mount over the credit quality of companies in their stables.
The bank informed private credit lenders that it had marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank, according to people familiar with the matter.
The move will limit how much money JPMorgan lends to private credit groups against those loans going forward — a sign traditional Wall Street banks are growing cautious of an industry that has grown rapidly as non-bank lenders became top creditors to higher-risk borrowers.
The loans that have been devalued are to software companies, which are seen as particularly vulnerable to the onset of AI.
Jamie Dimon, JPMorgan’s chief executive, told investors at the bank’s leveraged finance conference last week that it was being more prudent in lending against software assets, according to two people briefed on the closed-door meetings.
Troy Rohrbaugh, co-chief executive of JPMorgan’s commercial and investment business, told analysts at a February company update that the bank was becoming more conservative compared to its peers on the risks in private credit.
“As the world gets more volatile […] this outcome should be expected,” he said, adding: “I’m shocked that people are shocked.”
One person briefed on the bank’s decision said the valuation haircuts did not trigger margin calls at funds but were done to pre-emptively reduce the amount of credit available to the funds.
Private credit executives said they had not seen other banks take a similar view as JPMorgan.
“They have been more difficult the past three months,” the head of one fund said of JPMorgan’s willingness to provide back leverage. He added JPMorgan rarely got “rattled and this is the first time we’ve had a little issue”.
JPMorgan declined to comment.
Investors are concerned AI will heavily disrupt enterprise software businesses, with scrutiny centred on the companies and their private capital financiers who poured hundreds of billions of dollars into the space.
Publicly traded software stocks and debt have all plummeted this year. Private credit lenders, by contrast, tend to hold loans for the entire term and have not marked down their portfolios in lockstep.
Private lenders have said enterprise software companies are still growing and expect their loans to continue performing, as investors backstop the borrowers.
The growth of the private credit industry has been supplemented by leverage from regulated banks, debt that is critical in bolstering returns above high-yield bond or leveraged loan funds.
Banks including JPMorgan, Wells Fargo and Bank of America have all lent heavily to the industry, in part because regulations allow them to reserve less capital than if they were lending to borrowers directly.
The fundraising prowess of private credit firms, which took in $400bn from wealthy individuals and hundreds of billions more from savvy institutions since the end of 2020, has allowed the funds to provide larger loans and compete directly with banks on multibillion-dollar leveraged buyouts.
That included financing mega takeovers when software businesses were fetching high valuations given work-from-home trends, including Thoma Bravo’s $6.4bn takeovers of customer service software companies Medallia and Permira, and Hellman & Friedman’s $10.2bn buyout of Zendesk.
That debt is maturing in the coming years and much of it faces a dramatically different outlook.
JPMorgan is somewhat of an outlier in the private credit financing business as it reserves the right to revalue assets at any time. Most other banks require triggers such as missed interest payments.
Private credit funds can dispute the marks, according to a sample credit financing agreement reviewed by the FT. That could take months and require a third-party valuation. In the meantime, the bank’s determination remains.
The bank considers individual analysis and macroeconomic factors when valuing loans, according to another person familiar with the bank’s thinking. It also looks to public proxies, such as investment vehicles that buy private credit loans, and occasional private trades it can evaluate.
“The point is to do it as needed, not only when there’s a crisis,” one person said.