J.P. Morgan Chase & Co. is making the titans of private credit markets very anxious.
The biggest U.S. bank's foray into trading private credit loans — an as yet largely untapped corner of the $1.7 trillion market — threatens to lift the veil on a world where a key selling point has been privacy of information about the debt.
Some of private credit's biggest lenders argue such trading would undermine this advantage by forcing them to constantly value the assets on a marked-to-market basis, rather than at their discretion, inviting volatility. On the other side are smaller fund managers and investors in these loans who want more access to the debt and the ability to swiftly exit the assets trading would bring.
That existential debate may be a moot point. If, as some market participants expect, interest rates don't fall as quickly as predicted — crushing borrowers in the process — private loan valuations could tumble. That will unleash a wave of distressed debt bargains, making trading the assets on a secondary market like bonds a near certainty. And J.P. Morgan plans to be ready.
"As the market grows, it becomes inevitable," Troy Rohrbaugh, the freshly promoted co-head of J.P. Morgan's commercial and investment bank, said in an interview. "If you believe private credit will continue to grow and compete side-by-side with public debt markets, it can't continue forever as-is. Transparency will increase over time."
J.P. Morgan has already facilitated a couple of billion dollars worth of private trades after singling-out market making as one prong in its private credit strategy. While that's a drop in the ocean for the lender — the volume it has traded is less than the direct loans it holds on its own balance sheet — it's planning to expand as it steadily builds up an inventory of the loans.
Like its rivals, J.P. Morgan is fighting to stay competitive as private lending titans like Ares Management, Apollo Global Management and Oaktree Capital Management increasingly swallow up ever larger deals. The business of trading, which locks in lucrative fees while swiftly shifting the risk off the banks' books, has so far been a largely untapped portion of the market.
In a bid to stake their claim in an industry that threatens to upend their core lending businesses, major banks have been racing into other parts of the ballooning private credit complex. J.P. Morgan has earmarked at least $10 billion of its own balance sheet for direct lending, and is also working on forming a partnership. Barclays has also allocated its own cash, while Societe Generale and Wells Fargo & Co. have launched partnerships.
J.P. Morgan appointed Jake Pollack, a 20-year veteran of the firm, to oversee its private credit efforts alongside debt capital markets boss Kevin Foley. It cuts across multiple divisions of the bank and includes financing, securitization and also any trading, which is ultimately done through the bank's broader loan-trading desk. Longtime Chief Executive Officer Jamie Dimon and markets co-head Jason Sippel have also been involved in the overall strategy.
