JP Morgan shrinks lending to private credit companies

JP Morgan, the world’s largest bank, has restricted lending to private credit firms after marking down the value of its loans to software companies.

It’s a significant sign of distrust at a time of heightened volatility in global markets. Since the 2008 financial crisis, after which banks tightened lending criteria, private credit has grown fivefold into a $1.9tn market.

But a string of high-profile bankruptcies in recent months has led investors to question whether private credit loans are worth less than advertised on the tin. That, in turn, has led them to pull more than $4.5bn in cash from leading private credit funds in the last month.

Several managers, including Blackstone, BlackRock and Blue Owl, have set redemption limits in response, “gating” what can be withdrawn at one time. JP Morgan has fired a shot across the bow of an industry trying to muscle in on banks’ home turf of lending. But is this the start of a private credit downturn? Who will be exposed if liquidity dries up? As Warren Buffett said: “You only find out who is swimming naked when the tide goes out”.

Initially, private credit industry funding came from large institutions, such as pension and sovereign wealth funds. But, private credit firms found ways to bring in cash from individuals and retail investors via so-called “semi-liquid” funds. This flow has been increased by Donald Trump’s changes to 401(k) plans, which allow ordinary Americans to invest in alternative assets.

Now many of those fleet-footed retail investors are heading for the exit – only to find those funds aren’t quite as liquid as they expected. “In many of these private markets there tends to be a ‘boom-bust’ cycle,” says Josh Lerner, professor at Harvard Business School. “Whether it’s buyouts before the [financial crash], or venture capital in 2021, or private credit now; it’s during these periods where you have a huge influx of capital that you tend to have a lowering of underwriting standards as a result.”

The other worrying factor is AI. Software and technology companies accounted for roughly a quarter of private credit loans in 2025, according to S&P. The worry is that if AI agents can replace what those software companies do, revenues will collapse and loans won’t be repaid. UBS has warned that in an “aggressive disruption scenario”, default rates in US private credit could climb to 13%, up from a record 5.8% already.

Last week, the Financial Times reported that a Goldman Sachs executive had let slip in an online seminar that his clients in private capital were “glad” the conflict in Iran was providing a “distraction” from questions over the sector’s exposure to software. But recent private credit-linked scandals will not fade easily. They include: the collapse of a little-known Mayfair-based mortgage provider MFS amid fraud allegations has left creditors nursing a potential £1.3bn potential shortfall against loans; and the unwinding of US subprime car lender Tricolor in September, despite receiving triple A ratings. Its executives are accused in court documents of manipulating data to make “near-worthless” assets appear to meet lenders’ requirements.

They deny the charges.

Is this systemic? The key question is how deeply entangled private credit is with the banking system – and that includes UK institutions. Barclays, for instance, is already owed approximately £495m from its exposure to MFS and has made significant loans to private capital.

“In 2008, the use of collateralised debt obligations and instruments like that meant the risk was hidden,” says Dr Jón Danielsson, director of the Systemic Risk centre at LSE. “Even if banks lend to private credit companies, there is only the arms length-type exposure. And importantly, it’s all visible.”

But confidence matters. Private credit providers now face an unenviable choice: between blocking withdrawals and damaging trust or risking a fire sale of assets to meet redemptions. JP Morgan’s decision to move first may prove shrewd.

Photograph by Getty Images