JPMorgan Chase Says It Is Comfortable With $50 Billion in Private Credit Exposure. Should Investors Be?
Key Points
Non-traded business development companies have been limiting withdrawals, suggesting investor concerns about private credit.
Those concerns are reasonable, but JPMorgan Chase isn't as risky as a business development company.
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BlackRock (NYSE: BLK) has limited withdrawals from a large private credit fund. Blue Owl Capital (NYSE: OWL) has done the same thing with some of its private business development companies (BDCs). These decisions signal that Wall Street is nervous about private credit markets.
And still JPMorgan Chase (NYSE: JPM) is happy to have $50 billion in exposure to the space. Should you be OK with that? It's all relative.
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All in vs. just a part of a bigger business
Business development companies are, effectively, 100% focused on private credit. If Wall Street turns away from the sector, BDCs will likely suffer. The fact that sizable withdrawal requests are leading private BDCs to limit withdrawals is not a good sign. JPMorgan CEO Jamie Dimon believes that the credit cycle will eventually turn, and that losses on leverages loans will be material. Nor is he surprised that investors are trying to get ahead of the curve here, given that information about private credit loans is a bit opaque.
However, Dimon doesn't run a BDC. He runs a massive, $800 billion market-cap, highly diversified financial institution. His firm's $50 billion in exposure to private credit is fairly modest compared to the company's size, even though that exposure is much larger than peers like Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C), which have exposure of around $36 billion and $22 billion, respectively. There's another scale difference here: Citigroup and Wells Fargo have market caps closer to $200 billion. JPMorgan has the scale to take on more private credit risk than its smaller peers.
But don't stop there. Dimon points out that the size of the private credit market is about $1.8 trillion. That's roughly the same size as the high-yield bond and the leveraged loan markets. And all of them pale in comparison to the size of the mortgage loan and investment-grade bond markets, which are each $13 trillion. This is why Dimon doesn't see private credit as a systemic risk and why $50 billion isn't quite as large as it sounds.
Watch but don't worry too much
The big takeaway from the private credit market is nuanced. If you own a BDC, you might want to pay closer attention to developments in the private credit space. Pulling back your exposure could make sense, since even a hint of worry could send these stocks plummeting. According to Dimon, investor sentiment could sour even if there's no material change in credit risk, given the market's dynamics.
However, if you own JPMorgan, you probably don't need to be too concerned about its $50 billion in exposure to private credit. It is also worth noting that the bank's total loans tally up to $1.5 trillion, and it has cash and marketable securities of $1.5 trillion. In the grand scheme of things, JPMorgan is really just dipping a toe into the private credit market and not jumping in with both feet.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BlackRock and JPMorgan Chase. The Motley Fool has a disclosure policy.
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