The risks of private credit

You may recall the KFF series awhile back titled “Patients for profit: How private equity hijacked health care.”

Recently, The Wall Street Journal has been running articles on the growth of private credit.

Are private equity and private credit linked? 

“Private equity (PE) and private debt (PD) are often viewed as distinct investment strategies, but they are increasingly intertwined in today’s financial landscape,” says a blog post of the CFA Institute, a nonprofit that provides finance education to investment professionals.

“Rating agencies have pointed out that private credit lenders do not have to report their marks to market the way regulated traditional lenders like banks do. Making disclosure voluntary is a sure way to hide financial distress,” says CFA.

This morning, a Wall Street Journal article is headlined “Jamie Dimon says private credit is dangerous — and he wants JPMorgan to get in on it.”

“Jamie Dimon says Wall Street’s hottest trend is a recipe for a financial crisis, but he’s investing billions to get in on it anyway,” says the WSJ. “His plan: swoop in strategically and profit if there’s a meltdown.”

In February, Dimon said the boom in unregulated lending to highly indebted companies reminded him of the craze in subprime mortgages that sparked the 2008 financial crisis.

“The comparison was jarring,” says the WSJ, because just hours earlier, JPMorgan had announced that it was investing $50 billion in private credit. Banks typically have shied away from this business because of stiff regulations intended to protect depositors.

In May, another WSJ article reported that “investment bank loans to private-credit firms could pose a growing risk to the stability of the financial system, according to economists from the Federal Reserve Bank of Boston.”

The private-credit industry’s rapid expansion has been accompanied by increasing bank lending to the industry, including loans to firms and business development companies, or BDCs, that act as nonbank lenders, the WSJ said. And banks often finance this lending by nonbanks.

This tandem growth could be a cause for concern as banks could be indirectly exposed to higher risks taken by private-credit lenders with riskier clients that banks wouldn’t finance, the Boston Fed economists said.

Ever since I started this blog in 2009, two priorities have been to focus on how you and I can protect our families from future financial crises and from the increasing corporatization of health care.

If you come across articles on private equity and private credit, please send them to me.