Private credit branches out

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Lee Price: Hi there. You're listening to ‘Market Matters,’ our market series here on J.P. Morgan's Making Sense. I'm Lee Price from the FICC Market Structure and Liquidity Strategy team. In this episode, we're going to focus on recent developments in the ongoing evolution of the private credit market. It's no secret that private credit has grown tremendously in recent years. And as investors continue to allocate capital into private markets, we're seeing increasing diversification strategies across an array of asset classes. At the same time, recent market volatility has shifted the near-term outlook with opportunities and risks to consider. To help unpack these market structure trends, I'm joined by Jake Pollack, head of global credit financing at J.P. Morgan. Jake, thanks for being on today.

Jake Pollack: My pleasure. Thanks for having me.

Lee Price: Jake, you and I recorded a previous episode last fall where we spoke about the structural drivers behind the growth of private credit, such as bank regulatory reforms and the related rise of middle-market lending. And when I think about the market conditions back in September, there was a lot of optimism and expectations for outsized growth in the private credit space. But if you fast forward to today, you have to acknowledge the economic uncertainty. So the performance of private credit during market stress has been part of that growth story we discussed in the past. And certainly, we saw a very meaningful episode of volatility to start Q2 leading to record trading volumes across investment-grade and high-yield credit. And for direct lending activities, it's fair to wonder about what an economic downturn or a rising default environment would mean. Jake, as somebody who's responsible for credit financing across both public and private markets at J.P. Morgan, what are your observations on the current market environment?

Jake Pollack: Yeah, I think one of the key underlying drivers for both private and public credit creation is M&A. And the volume of M&A in the market has been lower than expected. Look, this has actually been the case in the past, really, 24 to 36 months, not just post-Liberation Day. So pre-Liberation Day, there was considerable hope that the new administration would be business-friendly, would unleash animal spirits, and that would, in turn, lead to more M&A volume. To date, that's not been the case, and owing largely to the uncertainty around tariff policy, which has stalled a lot of corporate activity as management teams try to adapt to the new operating environment. So that's just the state of play right now. I also think the second point I'd make is that lenders and investors are looking at their portfolios today and determining which companies have exposure to tariffs, specifically companies in retail or consumer or have international supply chains. And those businesses with those high exposures have to be accounted for. So that is all contributing to a level of uncertainty in the market that really has to resolve before you get increases in deal volume and in more credit creation.

Lee Price: And it seems like recent instances of volatility or stress in the market, each time, there are concerns about financial stability implications of private credit. Jake, do you see risks here?

Jake Pollack: I mean look, it's hard not to conclude that there's going to be an increase in stress across all corporate credit portfolios. And again, that's going to be public credit and private credit. So, no matter what the end state is, absent a complete 100% reversal of the April 2 tariff announcements, there's going to be some portion of companies whose way of doing business pre-April 2 doesn't really work anymore or at least works at lower margins or with lower revenues. It may ultimately be that it's not a huge portion of the market. We've learned time and time again that we should never underestimate the adaptive power of corporate America. It is truly a wonder of the world. But while I'm optimistic that we'll get to the other side of this in one piece, there will be some impact. So, I think that's the first thing I'd say. Now, as it relates purely to private credit, I don't see there being a material difference in credit performance between public and private credit. There are some reasons why public credit would outperform. There's more price transparency. There's public ratings. There's wider access in the investment community to the financials. But there's also some big reasons why private credit might outperform. One, the industries that have historically gone to direct lenders are typically less exposed to things like international supply chains. And I'm talking about software, healthcare, business services, insurance brokers. Those are the largest concentrations in private credit. I think historically in private credit, documents have been tighter, although that's eroded significantly in recent years. And then I think in private, you've also got simpler lender group and capital structures, which make restructuring transactions easier to effectuate if they need to happen. There's also a ton of dry powder on the sidelines in private credit, far more in private credit than public credit. So in any kind of prolonged dislocation, private credit and distressed investors will likely be a sort of port in the storm that can provide bids in the market for the cap structures that come under pressure.

Lee Price: OK. So it sounds like the impact is somewhere between a little and a lot,

Jake Pollack: (laughs) Yeah.

Lee Price: And not much daylight between the default experience that you'd have in public versus private markets.

Jake Pollack: Yeah, I think that's right. I think there's actually some reasons to expect private to perform better and some reasons to expect public to perform better. I would also say I think one of the biggest risks in private credit is actually definitional. So it's been such an effective brand in terms of marketing that it's led to a number of offshoot strategies from what it originally was, which was core middle market, first-lien, senior-secured lending. That activity, while there will always be risks, is generally sound. If the sponsor or the owner has substantial equity in it. The lender is the first in the capital structure to recover value. So I like the setup for that definition of private credit. When the definition expands to tranche investing, esoteric structures, mezzanine, the more difficult it is to understand or the more junior or the thinner the tranche that you're investing in, that is where you start building risks. And so I do see risks of nomenclature arbitrage for what private credit is more than the existing $1.5 to $2 trillion that is outstanding in private credit today.

Lee Price: And you mentioned private credit becoming this elastic label that in some cases is used to describe a wider range of activities, so it may explain some of the variance we've seen in terms of estimates on the total size of the market. And something we've discussed in the past is looking at the growth of private credit in the context of the broader subinvestment-grade credit market. So if you look back over the past 25 years, the market really increasing by over five times. And there are different financing mechanisms that drive that growth. So we've talked through broadly syndicated loans. We have high-yield bonds, and then, of course, we have private credit. So, Jake, when you think about that evolution, private credit versus other areas of the credit market, what stands out the most to you?

Jake Pollack: Well, it's an interesting question, and there's a lot there. To project forward, it's usually useful to look back. And if you look back to the early days of subinvestment-grade corporate credit-- so we're talking the '80s and '90s, the Drexel Burnham days-- in those days, the concept of leveraged loans didn't really exist. Junk debt was really all high-yield bonds, which were securities. So they were issuers that typically filed public financials with the SEC. If you fast forward to the turn of the century, there was a little less than about $1 trillion of high-yield debt outstanding. And basically, all of that was still in public bond format. Fast forward to today. The high yield bond market has grown by just about 2x. It's about $1.8 trillion today. And interestingly, most of that issuance is actually 144A, which is to say that those issuers are not publicly filing financials. At the same time, what we call public leveraged loans, that market has grown from basically nothing in 2000 to about also $1.8 trillion today, so the same size of the high-yield bond market. And this market, while it trades publicly, really isn't public in that the financials aren't filed with the SEC mostly. And disclosure is limited to, really, the holders of the loans. So you've got $1.8 trillion of high-yield bonds, which again, most of it is 144A. You've got $1.8 trillion of loans, leveraged loans, which most of it isn't filed publicly. And then you've got private credit or direct lending, which has grown to about, again, $1.5 and $2 trillion today, and this market's also private. And the holder base is small, and it doesn't really trade. The point is the market has exploded in size. It's gone from under $1 trillion to like $5.5 trillion today. But the public disclosure of financials has gone from almost all of it being publicly disclosed to only about maybe 10% of that $5.5 trillion disclosed. So what does that tell me about the next 10 years? I think we're likely to see a large increase in the amount of credit outstanding. And it's likely to be in private format, so less bonds, more loans. And a big percentage of that is likely to be in direct lending or private credit format.

Lee Price: I think when you break down the expansion into the underlying segments, it gives you a better sense of the story, because we have growth across all these segments within the market, but not in equal measure. And so at this point, there's no real argument whether private credit is here to stay. But the one question that has come up relates to whether there is convergence between public and private credit. I want to know what that observation means to you. Is the narrative shifting on the role of banks in the modern credit ecosystem?

Jake Pollack: Yeah, so it's a great question, and it's one we like to talk about a lot at J.P. Morgan. It's worth pointing out that many of the big players in the high-yield and public loans market are also big players in private credit. So this is true with the buy side. In a different way, it's also becoming true of the sell side. So many of the large buy-side debt investors have public markets investing arms that typically buy paper from the syndication desks of the sell side. And they also have their own private debt origination arms, which look to typically bypass the sell side and originate loans directly by employing their own private equity sponsor coverage teams that look to lend money in sponsor-owned companies. So you asked about banks also, and I mentioned it's becoming true of the sell side. Here, the story is evolving in real time. And by the way, there are going to be winners and losers here. So banks compete in a number of ways on this. One way is to provide leverage to the ecosystem in what's known as back-leverage financing. So here's where banks extend capital debt capital to direct lenders collateralized by the underlying loans. J.P. Morgan is a market leader in this space, and we've got a very strong competitive advantage here. Another more direct way is banks are increasingly looking to partner with and compete with direct lenders. And here, banks are participating in the loans themselves. So J.P. Morgan recently announced a $50 billion commitment to our own direct lending. This was upsized from $10 billion, what we initially said in 2021. And in this, we're lending directly to these companies and holding it on our balance sheet for the long term. We've also developed a successful co-lending program where our investor clients are able to lend alongside us in these direct lending deals.

Lee Price: OK interesting. And I imagine that allows the firm to serve both our borrower clients and provide access to our origination for investor clients of the firm. Jake, can you explain a little bit more about how that works?

Jake Pollack: Yeah, so first, we didn't invent the idea of co-invest or co-lending. Direct lenders and private equity firms and other GPs have been offering their LPs a co-invest for a long time, where it basically works-- if you commit to being an LP, right? You can sometimes also get the right to co-invest directly in some of the deals. Now, J.P. Morgan isn't a fiduciary in the commercial and investment bank. Our co-lenders are not LPs of ours. But we are able to offer our investor clients an incredibly powerful thing, which is access to our best-in-class corporate origination. So our co-lenders maintain their ability to decide whether to invest or not in the opportunity shown to them, and they get to invest alongside J.P. Morgan.  Now, some banks have opted for an exclusive partnership arrangement where they basically outsource the lending decision to one third party. We think that's suboptimal. Given the sheer breadth of investor clients we have, for us, it would certainly be impractical. For us to concentrate all of our firepower in one counterparty. And look, as I said earlier, there's going to be winners and losers. And I'm a lot more comfortable offering financing to a wide array of investor clients and also offering co-lending to a wide array of investor clients rather than putting all of our eggs in one basket.

Lee Price: OK, so a diversified model there. And Jake, you mentioned J.P. Morgan's $50 billion balance sheet commitment to direct lending. What do you think about this strategic investment in terms of what it says about the future of private credit? Does it signal increased bank participation in the space?

Jake Pollack: Well, look, I think it shows it's here to stay. It's not a fluke that the market has grown to nearly $2 trillion of direct lending. And by the way, it hasn't grown because it's cheaper than the public markets. Just the opposite. Direct lending is, on average, historically 150 to 200 bps wider than comparable public market debt. There must be a reason they're willing to accept wider pricing. And the answer is, especially when markets are volatile, there is a premium to the certainty and the speed of execution that direct lenders can offer that the public syndication process can't match. So look, I think our firm is doing it exactly right. We're saying, OK, we get it. Sometimes the borrower wants what can be a more expensive direct solution in exchange for that certainty, so let's offer it. And in fact, let's show the borrower both options at the same time. We show the syndicated solution, which with its wide auction mechanism, can provide the best price, but it requires the borrower to take some market risk. So let's show that side by side with the direct option, which is fast and provides more certainty.

Lee Price: Right, so it’s not necessarily the case that all banks are looking to enter the space or become active participants in the private credit market. What I do think is evident is this expansion of different credit financing strategies available. In the Market Structure team, we publish a watch list report every year with key themes. And for 2025, one of the developments we included on our list was the evolving opportunity set in private credit. So you think about credit financing options expanding into new areas. And when I think about new solutions that are emerging, Private Credit Collateralized Loan Obligations, or PCLOs, is something that really stands out to me. Jake, I wonder if you can give us a rundown of how that product is structured?

Jake Pollack: Yeah, so the underpinnings of the public broadly syndicated loan market is the CLO market. CLOs today own roughly 3/4 of the BSL market, and that's really a remarkable stat. Two years ago, that number was closer to 65%, and 10 years ago it was less than 50%. So you asked what are the origins of the PCLO market. It's really the same as the origins of the CLO market, which grew out of and really helped enabled the growth of the broadly syndicated loan market. So securitization can be a great thing. It's really a great thing for any market because it creates efficiencies that can drive down cost. The private credit industry hasn't seen much securitization life to date, but it is increasing. Five years ago, about-- call it 10% of the CLO market was private credit. And in 2024, that number grew to 20%. So clearly, it's growing. J.P. Morgan actually recently completed the largest PCLO of 2025, which was a $1.25 billion deal for HELND. And that was a deal we were super proud OF and the client was equally happy about our execution. We see a multifold growth – multifold growth opportunity I should say, in front of us in PCLOs. I think as the private credit market sees the benefits of how securitization can bring costs down, it's very natural for it to grow.

Lee Price: Got it. So it’s a relatively new offering, but one that represents an increasing share of the overall CLO market. And I would say notably we’re seeing growth in both the public and private CLO on a year-over-year basis. But it seems like the CLO market is a good example of this convergence that we spoke about, so definitely an area to keep an eye on. But I want to turn our attention to private credit origination activity. Jake, as more borrowers explore private credit financing solutions, there figures to be growth beyond just the subinvestment-grade segment. How do you define investment-grade private credit, and what's the impact that you think this will have on the overall credit market?

Jake Pollack: Yeah, IG private credit has been a big buzz term of late. There's estimates by a bunch of parties out there that IG private credit can be a $30 or $40 trillion industry. The reality is IG private credit is really just structured finance. So any market, whether it's IG corporate or consumer finance or residential mortgages, it can be structured in a private transaction with an equity tranche and a debt tranche that's rated IG. It's really not dissimilar to what we were just talking about, how a CLO is structured. If you have a pool of loans-- or, frankly, a series of cash flows, for that matter-- that you can value by creating a first-loss tranche-- and depending on a number of factors, I'm oversimplifying a little bit here-- you can create an investment-grade tranche. So I think the real thing that's happened isn't that the securitization phenomenon was just discovered. It's been around for decades, and in some ways, it's been around for centuries. What is new is how much capital has been raised for private credit. So, look, the sky's the limit. Any market that was historically a public market, if speed, certainty of price, privacy in certain instances are of value to an owner of the loans or of contracted cash flows, they now have this pool of capital and these GPs that are terrific fundraisers to turn to. So voila, you've got a private credit opportunity.

Lee Price: Yeah, agreed, definitely getting a lot of attention. And what you're describing is a bit of a mixture of market structure and marketing. So you mentioned there are various estimates out there in terms of the current size of the IG private credit market, and some of them are really eye-popping. So private credit ETFs is a related topic that's gotten a lot of attention lately, both from market participants and, to a lesser extent, regulatory agencies. We know that fixed-income ETFs have become big business, about a 20% growth in assets under management over the past decade. What's your take on private credit ETFs? Do you think this could be a meaningful solution for institutional market participants, or is it just a retail story?

Jake Pollack: So I think it gets back to, again, the definition of private credit. Certain things can’t be publicly traded. Your personal checking account, for example, I don’t think you’re going to see an ETF for Lee Price’s bank account at Chase. I think the same thing goes for a loan with just two or three counterparties. All of whom have LP’s who don’t want to sell the loan. Practically speaking, for that kind of private credit, I don’t see it being priced and fitting into an ETF. To be clear, the majority of the 1.7 trillion private credit industry today, looks like that. It’s small loans, sometimes only one lender, who don’t want to or practically can’t sell that loan. So I think if you expand the definition of private credit to include IG corporate, or real estate, or some other very large markets, where capitals are in the trillions, yeah, you can create equity traunches and then debt traunches rated IG on those pools. And then yeah, you can create a secondary market, and once that secondary market is created, then ETFs make a lot of sense. By the way, this is very similar to what the secondary CLO market looks like today. But again, you have to change the definition from one lender, or very few lenders, senior-secured corporate lending, what has historically been private credit. And you’ve got to r emember also that, when you change the definition, the risk and return profile may change too. So private credit historically has delivered, call it 10% on leveraged to investors with relatively few defaults. That’s a pretty good sharp ratio. But if you expand it to other pools, right? And you get to 30 or 40 trillion, we can’t just say, “oh yeah, the sharp ratio is going to be the same at 2 trillion as it is at 40 trillion.” So I have no doubt that the ETFs are going to grow in private credit as the definition expands, but it’s very important to focus on what the underlying is, and what the risk and return characteristics are for what it’s expanded into.

Lee Price: And you've mentioned some potential parallels between the CLO market and ETFs here. And it gets back to this central theme that as private credit branches out in all these new directions, it requires you to be diligent as a risk manager. So in some ways, the market is more complex, but the challenge is really looking past the all-encompassing private credit label and understanding the strategies themselves, the problems that you need to solve for.

Jake Pollack: That was well said.

Lee Price: Yeah, well, thanks. Jake, we're almost up on time, but we've covered a lot of ground today. We've got the financing market outlook, product innovation, the evolving competitive landscape. And as we head into the summer months, there's clearly a lot of dry powder still at play here. It's a really exciting market segment, and I can't wait to see what's next. Thanks so much for joining today.

Jake Pollack: Thanks for having me.

Lee Price: And to our listeners, thanks for joining us on ‘Market Matters.’ And stay tuned for more FICC market structure and liquidity strategy content on J.P. Morgan's Making Sense. Until next time.

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