JPMorgan Asset Management
- Investors have loaded up on private credit, pouring $240 billion into the asset class in just the last two years.
- With all this money comes cause for concern: groups like pensions, endowments, and foundations could suffer much more from a credit downturn than they have in the past.
- However, because credit exposure has shifted from huge banks to smaller groups, the executives said any downturn won’t freeze up the financial system like the last recession did.
Investors may love private credit too much.
Private credit has garnered $240 billion in inflows in the last two years alone, as non-bank groups filled the gaps left by banks leaving the lending space post-recession. Institutional investors, such as pension funds, endowments, and foundations, have stepped up to fund those non-bank groups.
"This will end poorly," Anton Pil, JPMorgan Alternatives’ managing partner said at a media event last week. "It’s just a question of when. Because inevitably there will be people who bought private credit who thought it only goes up and they had a lot of assets behind it, and it’ll turn out that when the bills aren’t getting paid, those assets probably aren’t worth what everybody thought they were."
David Lebovitz, JPMorgan Asset Management’s global market strategist, said he doesn’t see another "mortgage-type crisis" similar to the last recession on the horizon, though he acknowledged systemic risk is difficult to spot in advance. Any credit downturn could exacerbate a financial crisis, he cautioned.
"I don’t see it freezing up the financial system the way that we saw in the midst of the financial crisis when the banks were on the hook for a lot of these loans. It would pour fuel on the fire that’s already burning in the form of underfunded pension plans," Lebovitz said. "I think where this is really going to pinch is much more on the social side of things. How do we deal with pensions, endowments, foundations, which have perhaps loaded up on these assets during the twilight years of the cycle?
The JPMorgan executives’ comments echoed those made by chief executive Jamie Dimon earlier this year. On the bank’s fourth quarter earnings call, Dimon said the firms that lurk outside the traditional banking system, known as shadow banks, are first in line for pain when the leveraged-lending cycle eventually turns.
Compared to the traditional banking sector, "shadow banks, they do things differently," Dimon said.
"You will have a recession, it just won’t be like you had the last time," Dimon said. "We’re a bit canaries in the coal mines. We’re not immune to what goes on in the economy, and it won’t be anything like you saw last time for much of the large banks."
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