Private Credit Crunch: JPMorgan Limits Exposure, Morgan Stanley Fund Caps Redemptions

The signs of stress in the $1.8 trillion private credit industry are becoming more and more public. 

Multiple reports on Wednesday confirmed that JPMorgan, America’s largest bank, reduced its exposure to private credit by marking down the value of loans it holds as collateral. At the same time, the nation’s sixth-largest lender, Morgan Stanley, limited redemptions at one of its private credit funds after investors asked to repurchase nearly 11% of shares.

‘Crisis of Really Bad Underwriting’

The private credit loans JPMorgan devalued were made to software companies. Because the bank holds them as collateral, trimming their value limits how much the funds that made the loans can borrow. That means less exposure to a sector JPMorgan CEO Jamie Dimon has long trashed (a person familiar with the matter noted this was a preemptive move that affects a small number of borrowers and represents only changes in loan valuations, not actual losses).

For the impacted funds, it means less borrowing capacity at a time when investors are pulling money over concerns AI will devour the software industry, which comprises some of private credit’s biggest borrowers. Funds at Blue Owl, Blackstone and BlackRock have been hit hard by withdrawals. Earlier this week, fund manager Cliffwater joined the casualty list: An investor exodus spurred redemption requests of more than 7% from its flagship private credit fund. Then came Morgan Stanley’s North Haven Private Income Fund, which said in a letter to investors that it’s capping quarterly redemptions at 5% and returning about 46% of the total amount that holders requested in the first quarter. Retail and institutional investors were initially drawn to private credit because the loans typically yield higher returns than public bonds. But prominent Wall Street figures are warning that underwriting standards have slipped. “It’s not just a crisis of confidence, it’s a crisis of really bad underwriting,” Christian Stracke, president of $2.3 trillion asset manager Pimco, said during a podcast appearance this week:

• “The reality is you don’t know which manager is good, which one is bad,” he added. “You don’t know which loan is good, which one is bad. And if you’re in this for yield and you see that there’s really interesting yield in other products out there that are more liquid, that are more diversified, that have better credit, that have actual credit ratings to begin with, then you have options.”
• Wall Street veteran and former Fidelity fund manager George Noble expressed similar concerns. “Opaque valuations. Illiquid assets. Limited transparency. And the false promise of steady returns with no volatility,” he wrote in a tweet. “The whole sales pitch was equity-like returns with bond-like stability. But you can’t eliminate volatility, you can only hide it … until you can’t.”

Stock Shock: Shares of major private-credit lenders are down significantly this year: Apollo has lost 26%, KKR 31%, Blackstone 30%, and Ares 35%. The VanEck Alternative Asset Manager ETF, which has holdings in major publicly traded private credit firms, is down more than 20%.