Private credit's hard lesson

The panic withdrawals pummelling the North American private credit industry have, to date, sliced more than US$330 billion (A$500 billion) off the market capitalisation of the biggest fund managers. Further unquantified (and unquantifiable) losses have been suffered by investors in unlisted private credit funds – those not listed on a stock exchange – who have taken a loss selling out at a steep discount to the funds' claimed asset backings. 

As the zeitgeist lurches from FOMO (fear of missing out) to FOLM (fear of losing money), America is returning to one of its core skills: creating financial panics through over-aggressive financial engineering. Last week Jamie Dimon, JP Morgan's executive chairman, gave the panic a shove along, restating his view that private credit investors are heading for significant losses.[[JP Morgan has previously tightened lending criteria for borrowings by private credit funds, forcing those funds to liquidate assets to remain within lending covenants. The bank also provides facilities to hedge funds which may have shorted stocks of private credit originators.]]

The US private credit crisis remains in its infancy and has some way to run. Most of the big-name Wall Street fund managers have restricted redemptions from private credit funds.  This staunches the bleeding in the short term but, as always, the disease will win in the end. Some private credit funds will be fine and investors will get back close to 90 cents in the dollar. But there will be many others where liar-loans comprise a large proportion of portfolios and investors will suffer a total wealthectomy.