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--:-- Annie Minoff: Welcome to The Journal. I'm Annie Minoff.
--:-- Alexander Saidi: Thanks for having me on the show.
--:-- Annie Minoff: Today, we're talking about private credit, the hottest trend on Wall Street. Our colleague Alexander Saidi was at the JPMorgan leveraged finance conference in Miami, where the CEO of JPMorgan Chase, Jamie Dimon, made a keynote address that sent shockwaves through the industry.
--:-- Alexander Saidi: That's right. It's February in Miami, blue skies, a balmy day. And inside a luxury hotel on South Beach, the ballroom is packed with Wall Street types. They're here for a working vacation, if your idea of a vacation is JPMorgan's leveraged finance conference.
--:-- Annie Minoff: So, what was the main event at this conference?
--:-- Alexander Saidi: The main event was a keynote address by Jamie Dimon, the high priest of American banking. He's the CEO of JPMorgan Chase, the biggest bank in America.
--:-- Annie Minoff: And what did he say in his keynote address?
--:-- Alexander Saidi: He said he was worried about a trend he was seeing in financial markets, in something called private credit. It's a type of lending to companies that's largely unregulated, growing like gangbusters, and that to Dimon at least, feels like déjà vu.
--:-- Annie Minoff: So, what is private credit?
--:-- Alexander Saidi: Private credit at its core is lending. It's lending money to a company. Now, you would be fair to ask, why is lending money a hot new trend? Well, the reason why is that it's largely unregulated. So, when banks loan money, they follow strict rules. Because the money they're lending, it ultimately ties back to customer deposits. But with private credit, it's not a bank that's making the loan. It's a private fund.
--:-- Annie Minoff: And who are some of the biggest players in this space?
--:-- Alexander Saidi: Some of the biggest are run by Blackstone, Apollo Global Management, and Aries Management. The money that these firms are loaning comes from private investors. And because they're not banks, these funds don't have to follow banking rules. They can operate more in the dark. Shadow banks. That's a term that's used.
--:-- Annie Minoff: So, how did this whole wild west of private credit even start?
--:-- Alexander Saidi: The trend actually sprung out of an effort to make financial markets safer. After the 2008 financial crisis, a lot of the blame fell on banks for making too many risky loans. And in response, lawmakers strengthened banking regulations. Our financial system only works. Our market is only free when there are clear rules and basic safeguards.
--:-- Annie Minoff: But what happened is that banks pulled back from riskier lending, and private credit funds stepped in to fill the void.
--:-- Alexander Saidi: That's right. These unregulated private investment funds have been offering more aggressive and risky debts to companies that banks have historically shied away from because of the risk that's involved.
--:-- Annie Minoff: And what's the appeal of private credit for companies?
--:-- Alexander Saidi: Private credit funds are satisfying that demand for riskier loans. But in exchange for taking on that risk, they're charging higher interest rates. They're lending at really like 10%, you know, 11%, maybe 9%, which is still relatively high, but it's serving a need.
--:-- Annie Minoff: So, Jamie Dimon was initially shrugging off the growth of private credit. But then, things started to change.
--:-- Alexander Saidi: Yeah, because then these deals get big. Very big. In the beginning, private credit funds were making loans to smaller companies. Loans that JPMorgan might not have been interested in making anyway. But then, loans and deals started to be worth billions.
--:-- Annie Minoff: And what's the impact been on JPMorgan?
--:-- Alexander Saidi: JPMorgan started to look like private credit was eating its lunch. You can look at data that shows the percentage of acquisitions that companies are doing financed by banks versus private funds. And it goes from majority bank to majority private fund in the span of about 10 years, I would say, between like 2015 and 2023.
--:-- Annie Minoff: So, what's Jamie Dimon's strategy now?
--:-- Alexander Saidi: Jamie Dimon had a problem. He'd watched the private credit market explode from under $10 billion in 2006 to over a trillion dollars today. Dimon wanted a piece of that action. But JPMorgan is a bank, not a shadow bank. And it has to follow bank rules.
--:-- Annie Minoff: And how is JPMorgan going to compete with shadow banks without becoming one?
--:-- Alexander Saidi: JPMorgan's private credit team has already been out making deals. Walgreens is being bought by a private equity firm in a multi-billion dollar deal. As part of a larger Walgreens deal, JPMorgan helped fund a $2.6 billion loan for a specialty pharmacy called Shields.
--:-- Annie Minoff: And what's the risk here?
--:-- Alexander Saidi: The Shields loan in total was worth nine times what Shields earns in a single year. So, that's like, just think about that. Like think about the total amount of profit a company would make multiply that by nine and that the amount of debt that they borrowed. Okay. This is not the kind of vanilla loan that maybe an old JPMorgan would have made.
--:-- Annie Minoff: And what's Jamie Dimon's stance on the private credit market?
--:-- Alexander Saidi: Even as JPMorgan has started offering loans like the other guys, Dimon hasn't abandoned the idea that this whole private credit thing could be a bubble. And if it pops, he wants JPMorgan to make money off that, too.
--:-- Annie Minoff: So, why should listeners care about this?
--:-- Alexander Saidi: If you care about the safeness and soundness of our economy and our financial system, you need to be clued into how private credit is growing and the extent to which it's doing so safely. Because if it's too risky, you could wind up seeing something like we've seen in past financial crises where institutions blow up and everyday people get hurt because of it.
--:-- Annie Minoff: Thanks for explaining this complex topic to us, Alexander.
--:-- Alexander Saidi: Thanks for having me on the show.
--:-- Annie Minoff: That's all for today's episode. If you want to learn more about private credit and how it's affecting the economy, check out our episode notes and links on our website. We'll be back tomorrow with another episode of The Journal. Thanks for listening.
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--:-- Annie Minoff: The Journal is a co-production of Spotify and The Wall Street Journal. Get show merch here: wsjshop.com/collections/clothing.
