The explosion of private credit has been met with a whole host of concerns, but among the louder ones more recently is that the industry has not experienced a downturn at scale. And therefore, what does that mean for borrowers when there’s some kind of crisis?
When asked about the migration of assets to the non-bank sector during JPMorgan’s Investor Day earlier this week, Chairman and CEO Jamie Dimon said, “we’ll compete. We’re going to be fine.” But he added that the “question they should be asking is, what does it mean for the United States of America?”
“A lot of those folks who took private-credit loans will be stranded when [obscenity] hits the fan,” Dimon said. “Banks tend to work with the borrower and the middle-market loan in the crisis…in the mark-to-market world of private credit, they have to, as a fiduciary, book it at par.”
In other words, he said, “private credit hasn’t dealt with high interest rates, hasn’t dealt with the recession, and it hasn’t dealt with high spreads.”
We don’t know how those workouts will…work.
The next day, the CEO of one of the largest private-credit firms defended the industry and how it will act in times of stress. When asked on CNBC about Dimon’s recent comments, Ares Management CEO Michael Arougheti responded: “False.”
“We’ve been investing in the private markets for 30 years; A loan is a loan whether it’s held on a bank balance sheet or held in a private-credit fund,” Arougheti said. ”[Ares has] invested $150 billion into the private-credit market since we founded the firm, and we had a loss rate of one basis point. So everything that we’ve seen over the last 30 years would indicate that the risk people are trying to argue exists in our market just isn’t true.”
