Jamie Dimon, chief executive of JPMorgan Chase, has cautioned that further financial vulnerabilities will emerge, echoing concerns about a rapidly expanding sector of lending known as private credit.
The warning comes as businesses and consumers brace for another potential energy shock driven by escalating conflict in the Middle East, while a separate, and increasingly urgent, crisis brews within the financial system. Experts fear a potential cascade of failures reminiscent of the 2008 financial meltdown, where interbank lending ground to a halt.
Private credit, a relatively obscure funding avenue, has flourished since the 2008 crisis as traditional banks retreated from higher-risk lending. These entities, often described as ‘shadow banks,’ provide loans to companies that avoid the scrutiny of public stock markets. The industry has ballooned into an £8.2 trillion market dominated by firms like Blackstone, Apollo, KKR, BlackRock and Blue Owl.
Unlike regulated banks, private credit firms do not accept deposits from savers. Instead, they raise capital from pension funds, insurers, and other investors, lending it to private companies in pursuit of high returns. This has attracted mainstream banks, which now lend to these private credit funds, raising concerns that a collapse in the sector could ripple through the wider financial system.
These concerns are amplified by the impending allowance, starting next month, for British savers to invest in private credit funds through individual savings accounts (ISAs).
Trouble signs emerged last year with the collapse of two US-based private credit firms, prompting fears of lax lending standards. Dimon’s subsequent warning that “more cockroaches” would surface proved prescient. In February, Market Financial Solutions, a London-based mortgage broker specializing in property-backed loans, failed, leaving creditors including Barclays and Santander facing an estimated £1.3 billion shortfall.
The failures triggered a rush for the exit among some private credit investors, but major players responded by restricting withdrawals. BlackRock capped withdrawals from its flagship private credit fund at 5 per cent after investors sought to redeem nearly double that amount. Blackstone has been scrambling to meet a record £2.8 billion in withdrawal requests, while Blue Owl has halted redemptions from one of its retail-focused funds.
JP Morgan has also curtailed lending to private credit, and Morgan Stanley suspended withdrawals from a private credit fund after investors attempted to pull out more than 10 per cent of their holdings. Christian Stracke, president of Pimco, the £1.7 trillion asset manager, last week warned of a “reckoning” for the industry, citing “a crisis of really bad underwriting” and concerns about insufficient due diligence on borrowers.
The lack of transparency and limited liquidity are inherent features of the sector. Loans are not traded on exchanges, and funds determine their value, allowing investors to sell only limited amounts during restricted ‘windows.’
Comparisons are being drawn to the sub-prime mortgage crisis of 2008, with both involving complex financial structures that obscure risk and loans to borrowers shunned by mainstream banks. While the private credit market is smaller than the sub-prime market in 2007, and lenders maintain that default rates, though rising, are manageable, the Bank of England is sufficiently concerned to launch a stress test to assess the links between private credit and the broader financial system.
The Bank of England was forced to intervene in 2022 to rescue the pensions industry after the disastrous ‘mini-budget’ under Liz Truss exposed hidden borrowing in workplace retirement schemes, forcing funds to sell assets to avoid collapse.
One potential trigger for further instability could be artificial intelligence (AI). Private credit funds invested heavily in software companies during the recent tech boom, but the emergence of AI threatens to disrupt their business models through automation.
“If investors start to worry about private credit, or something else, it is their more liquid assets, such as listed equities, that they may rush to sell first,” says Fergus McCorkell of Troy Asset Management. He also points out that periods of lax oversight, abundant credit, and ‘financial innovation’ have historically ended poorly.
The potential impact extends to ordinary savers. A collapse in the private credit market could affect bond markets and banks, as lenders who have funded the boom may suffer widespread defaults. A portion of pension pots may already be directly invested in private credit, as fund managers respond to government pressure to allocate capital to the sector. Investors are advised to check where their contributions are being directed.
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