Jamie Dimon Calls Private Credit Risky—But JPMorgan Is Jumping In

Jamie Dimon says Wall Street’s hottest trend it's a formula for a financial crisis, yet he's pouring billions into participating regardless. his strategy: enter wisely and gain from a collapse.

At the ballroom of the upscale Loews Hotel in Miami Beach, Dimon took the stage before hundreds of clients in February to discuss the surge in unsecured loans to heavily indebted businesses. This rapidly expanding sector has been pushing aside major banks for some time, and Jamie Dimon, CEO of JPMorgan Chase, remarked that it resembled the frenzy surrounding subprime mortgages which triggered the 2008 economic downturn.

"Several aspects of direct lending are positive," Dimon stated during an event in February, as reported by attendees. "However, not all individuals perform well, and this is what leads to issues with financial products." He mentioned that during the 2008 financial crisis, Bear Stearns and Lehman Brothers entered too late, made poor decisions, and "purchased these two subpar small mortgage firms," which ultimately resulted in everything collapsing.

The contrast was striking. Only hours before, JPMorgan revealed plans to invest $50 billion into private credit, coming over ten years after investment firms like Blackstone and Ares Management—non-bank entities—initiated the surge in loans to high-risk businesses. Financial institutions usually avoided this area due to strict rules designed to safeguard customer deposits.

One of the most accomplished bankers in recent history, Dimon has gained admiration across Wall Street and outside for guiding JPMorgan clear of financial trends that caused other companies to collapse. Economists and certain central bank officials warn these higher-risk loans might serve as a significant factor in an emerging financial crisis, should businesses burdened with excessive costly debt face an economic slowdown.

However, despite Dimon stating that he sees historical patterns repeating in private lending, he is making a significant move into the market.

The private-credit business has grown Over the last twenty years, fast growth has occurred in the amount of capital gathered for loans to companies backed by private equity — which constitutes the largest segment of the market — increasing over 100 times since 2006, reaching almost $700 billion in 2024. The emergence of private credit has challenged banks' profitable loan businesses targeting corporations in America, leading JPMorgan and certain rivals to suffer losses as their newer, less regulated counterparts have grown rapidly.

Bank officials claim that over the past few years, federal supervisors have granted certain leniency in applying loan regulations, as reported by individuals who know about this issue, allowing financial institutions to enter the marketplace.

Dimon is working quickly to secure an interest before JPMorgan, the country's largest and most successful bank, gets left out, according to individuals who know his perspective. Regardless of whether a crisis occurs, Dimon has stated that he believes JPMorgan can be positioned for gain. He possesses a demonstrated history of entering situations where unstable structures collapse—like following the 2008 event—to acquire failing companies and extract their strongest elements.

There might be some discomfort," stated Troy Rohrbaugh, who serves as co-head of JPMorgan's commercial and investment banking division. "However, we continue to maintain our focus.

A large fish escapes A sizable fish slips free An enormous fish manages to get loose The big fish evades capture One massive fish gets out of reach A huge fish avoids being caught The substantial fish makes its escape A considerable fish goes unnoticed A mighty fish eludes detection An impressive fish remains at large

The surge in private credit began gaining momentum around 2015. Leading private equity firms and other entities, equipped with hundreds of billions of dollars collected from pension funds and university endowments seeking better yields, ventured into business loans.

They offered borrowers a straightforward proposal: they could access money quicker and under more adaptable conditions, like the option to defer interest payments and add them to the overall loan amount, compared to traditional banks. Businesses typically did not need to cover the cost of a credit assessment and were able to secure larger loans than what was possible through banking institutions.

Lenders offset the increased risk by imposing a higher interest rate. According to a study released by Fed economists in 2024, businesses typically paid 2% to 3% more when borrowing from private credit firms. Although default rates have stayed minimal, the researchers noted that the market hasn’t experienced an extended economic downturn yet.

JPMorgan had initially been involved in the market but allowed its private credit division to decline right when the surge began.

Following the 2008 economic downturn, financial institutions located on Wall Street faced significant losses tied to the housing market collapse and began reducing their loan offerings.

Earlier, JPMorgan recruited Scott Kapnick, a senior executive from Goldman Sachs, to develop a private equity and distressed debt approach within Highbridge, a hedge fund under its ownership. He filled the lending void by launching a new fund targeting loans for smaller and medium-sized businesses. The fund imposed slightly higher interest rates, anticipating that banks would later return to offer refinancing at reduced rates, allowing Highbridge to be fully repaid.

However, by approximately 2011, banks had not yet recovered. Regulations implemented following the financial crisis caused banks to be more hesitant about lending money. As a private investment firm—that isn't bound by the banking laws designed to safeguard regular consumers' savings—Kapnick and his group at JPMorgan began securing billions of dollars to provide bigger loans, capitalizing on the ongoing changes within the conventional banking sector.

Dimon and Mary Erdoes, a long-time associate of Dimon who managed the department responsible for overseeing Highbridge, desired that Kapnick and his team collaborate with other groups within the large banking institution. However, they frequently declined to provide funding for certain transactions presented by JPMorgan's investment bankers, as they perceived limited returns compared to the risks involved. Additionally, the newly established fund was beginning to identify its own sources of investment opportunities.

In the meantime, top leaders at Highbridge began to fear that government officials might compel them to close their loan operations. JPMorgan had pledged to reform its approach to managing risks following its "London Whale" incident in 2012, during which traders made high-stakes wagers that senior bank managers were largely unaware of, resulting in losses exceeding $6 billion, prompting the institution to acknowledge fault and consent to financial penalties. over $920 million in penalties The next year, authorities introduced more stringent rules on the amount of risk banks could assume in business loans.

In 2015, Kapnick along with other top leaders invested more than $1 billion to separate the private-credit division. This move led to the creation of one of the largest private-credit firms globally, currently overseeing a loan portfolio exceeding $157 billion. In the previous year, BlackRock spent $12 billion to purchase the company, which is now known as HPS Investment Partners.

Since then, Dimon has informed JPMorgan executives that, looking back, he thinks the loss of HPS was one of the major mistakes the bank made recently.

Back then, JPMorgan was generating unprecedented profits as Dimon grew Chase Bank, its consumer division, and the investment banking segment continued to earn billions by catering to the globe's largest corporations. It was also benefiting from the emerging trend by allowing the bank to lend its own capital to private credit funds, known as "back leveraging." Financial institutions often engage in this practice since they receive substantial compensation with less exposure compared to directly loaning money to businesses.

During an interview with Bloomberg in 2016, Dimon recognized the expansion of private markets but stated that JPMorgan wasn't overly concerned. "We also generate profits, so I'm not particularly bothered," he remarked.

Growing competition

However, by 2020, Ares set new benchmarks with a $2 billion loan extended to the Ardonagh Group, a UK-based insurance company. This transaction represented the largest private debt deal ever recorded at that point. In 2021, Thoma Bravo's purchase of Stamps.com was funded through approximately $3 billion in debt, mostly sourced from private credit companies such as Ares and Blackstone.

The transactions raised concerns. Banks have played a leading role in organizing and funding leveraged buyouts since their rise in the 1980s. At that time, Jimmy Lee from Chemical Bank, now part of JPMorgan, pioneered the syndicated loan system, enabling businesses to access a group of lenders for deals that banks facilitate.

Currently, banks are being excluded from the process, losing billions of dollars in income. Besides the loan itself, banks generate profit through various associated financial services, including managing interest payments and developing investment products using the debt. Dimon mentioned earlier this year that approximately 60% of the bank’s earnings from medium-sized businesses come from these additional services.

Several of JPMorgan's leading investment bankers attributed the back-leveraging operations as a source of support for their rivals. Ares, in particular, had secured billions in loans from JPMorgan throughout the years and was now utilizing those funds to compete against JPMorgan for transactions.

With increasing competition from private firms capturing larger portions of the market, Dimon believed the bank should revitalize its own private loan operations, according to individuals who understand his perspective. Meanwhile, Dimon expressed worries that the rapid expansion in direct lending resembled a speculative bubble, and in a 2021 annual letter to JPMorgan's investors, he emphasized that private credit required "careful oversight."

The bank also started considering ways to provide the loans without violating post-financial crisis banking rules designed to curb excessive risk in lending, according to individuals involved. A significant portion of the expansion in private credit was driven by high-risk loans that banks usually steer clear of, meaning JPMorgan needed to determine how it could issue these loans without facing regulatory penalties.

The bank introduced a private-credit fund closely inspired by the former Highbridge unit, once more led by Erdoes within the asset management department. The intention was for this initiative to operate independently from the main bank, thus avoiding strict regulatory requirements. In 2020, Erdoes appointed one of her trusted deputies, Meg McClellan, as the global leader of private credit, and recruited two experienced bankers from Wells Fargo who had expertise in providing loans to small businesses. They brought on several analysts and secured $10 billion from the bank to launch the new approach.

By early 2022, Dimon and Erdoes abandoned their entire plan. Instead, Dimon chose to utilize the bank's balance sheet, directing part of JPMorgan's $100 billion in surplus capital toward the investment banking division for private loans. These funds exceed the minimum reserves that banks must maintain to safeguard customer deposits.

Under the updated structure, investment bankers collaborating with firms would be able to provide loans directly to those companies, rather than needing to go through a Chinese Wall to Erdoes' asset management unit for deal approvals.

Dimon allocated $10 billion toward the private credit initiative.

Several leaders were happy, viewing the loans as a method to enable additional transactions and remain important in an evolving finance industry. However, certain traditional bankers regarded it as evidence that the banking-focused approach to business financing was coming to an end, replaced by a more complex system that JPMorgan did not control.

Walgreens deal

According to the updated strategy, JPMorgan now provides business customers with either conventional syndicated loans or a private credit alternative—potentially offering bigger amounts or more adaptable conditions in return for a higher interest charge.

A source acquainted with JPMorgan mentioned that the company maintains ongoing communication with regulatory authorities while overseeing risks within its private lending activities. Additionally, the bank sets internal risk thresholds for transactions it chooses to engage in, according to the individual.

If the client opts for a private loan, JPMorgan typically keeps it on its records and gathers interest until the loan reaches maturity. In certain instances, the bank bundles the debt for a small number of private credit funds that collaborate with the institution, such as Soros Fund Management and Octagon Credit Investors.

Initially, the bank primarily handled smaller transactions worth a few million dollars. JPMorgan is not as influential as other major banks in the realm of private equity.

The necessity to expand became more evident. Last summer, JPMorgan missed an opportunity to assist Intel, a long-standing banking client, in constructing a significant data center in Ireland.

Rather, Apollo, a rival in the private markets sector, allocated $11 billion to the semiconductor company via an intricate arrangement wherein Intel would provide fluctuating dividends to Apollo in return for the funding. JPMorgan proposed a simpler loan agreement that would have been more expensive for Intel, according to individuals who know about the transaction.

As a bank, you can only observe private lending emerging out of thin air and evolving into a $1 trillion sector for so long," stated Glenn Schorr, a senior analyst at Evercore who focuses on Wall Street. "This is what its customers are demanding.

In February, JPMorgan revealed an increase in its private credit investment to $50 billion—on the very same day that Dimon spoke out at the Loews Hotel regarding unethical players and the collapse in mortgage markets.

Shortly thereafter, JPMorgan made a transaction with a private equity company Sycamore Partners, poised to acquire Walgreens Sycamore Partners, preparing to take over Walgreens Sycamore Partners, in the process of purchasing Walgreens Sycamore Partners, set to obtain control of Walgreens Sycamore Partners, moving forward with buying Walgreens They had to organize loans amounting to approximately $13 billion. The transaction ultimately was worth nearly $24 billion when including the debt.

Walgreens operates through three distinct business segments. A newly formed private-credit division at JPMorgan provided funding for Sycamore's acquisition of Walgreens' Shields, which specializes in pharmacy services. To support this deal, Walgreens took on significant debt—approximately nine times the amount that Shields generates in earnings—which would typically be considered a "non-pass" credit, an industry term indicating it was too high-risk for conventional banking institutions.

JPMorgan provided financing for the $2.6 billion Shields segment of the transaction alongside Goldman Sachs' asset management division and HPS, which was previously its private credit arm. HPS contributed over half of the capital, while JPMorgan and Goldman Sachs shared the remaining amount. JPMorgan will continue to hold the Shields loan on its balance sheet until it reaches maturity.

JPMorgan facilitated a conventional syndicated loan for Walgreens' global operations, encompassing the Boots retail network, and also provided an asset-based loan for the remaining portion, the main U.S. physical store locations.

The bank stated that the Walgreens transaction, among the largest leveraged buyouts in recent years, demonstrates that its traditional and newer loan services do not necessarily compete with one another and can actually attract customers seeking both options. "We're the Switzerland of financial solutions," remarked Kevin Foley, who leads JPMorgan's global capital markets division.

Dimon continues to express his disapproval of how certain private credit companies are now relying on savings from individual investors to support their fast growth, marking a departure from the traditional approach of assuming risks solely with funds from large institutional backers.

Blackstone, KKR, and Apollo have all recently introduced new initiatives Blackstone, KKR, and Apollo have each launched recent developments Blackstone, KKR, and Apollo have all created new programs lately Blackstone, KKR, and Apollo have recently undertaken new projects Blackstone, KKR, and Apollo have all initiated new efforts recently Blackstone, KKR, and Apollo have recently expanded their offerings Blackstone, KKR, and Apollo have all made recent advancements Blackstone, KKR, and Apollo have recently implemented new strategies Blackstone, KKR, and Apollo have all taken steps toward new ventures Blackstone, KKR, and Apollo have recently rolled out fresh initiatives private credit investment options designed for individual investors Many companies are also tapping into small-scale savings accounts by collaborating with insurance providers and utilizing annuities to expand their loan operations more quickly.

Fabio Natalucci, director of the Andersen Institute—a research organization—stated that numerous firms operating in the private market are emulating banking activities without being subject to similar regulatory requirements. Having spent 16 years studying financial stability with the Federal Reserve, Natalucci noted that the broader economic risks posed by these entities aren't fully comprehended due to their rapid expansion.

We haven’t witnessed this industry, at such a scale, experience a significant decline," he stated. "It has expanded rapidly over the last ten years, which might pose a risk.

Dimon also informed Congress in 2023 that private lending was driving economic activity beyond the reach of regulators. During a meeting in 2024, he warned that there could be serious consequences if many loans go bad and regular investors end up suffering the losses.

I believe credit today carries significant risks," as its "carefree" expansion has not yet faced a recessionary test, Dimon stated in May during the bank's investor event. However, he also mentioned, "there will be substantial opportunities for this company as well.

Contact Alexander Saeedy at alexander.saeedy@wsj.com