JP Morgan Places $3T Valuation on Private Credit Market
JPMorgan’s private bank has endorsed the potential of direct lending in the private credit sector, estimating that the total private credit market is worth more than $3 trillion.
Preqin estimates that the private loan market is worth $1.5 trillion to $1.75 trillion. However, a new report by JPMorgan Private Bank claims that Preqin’s projections are too low since the data firm undercounts business development companies and fails to account for leverage. Considering this, the bank estimates the real size of the private credit market is $3.14 trillion.
A new report by JPMorgan’s chief investment strategist Thomas Kennedy, global investment strategist Chris Seter, and Brian McDonald, head of alternative investments, global investment opportunities, found that there was still plenty of upside in the private credit space despite “a steady drip of negative headlines.”
JPMorgan’s 2024 Long-Term Capital Market Assumptions forecast that direct lending will generate annual total returns of more than 8.5% over the next 10 years, with even larger returns expected in the coming year.
High yield and investment grade spreads in the direct lending market have reached their tightest levels since 2010, according to the authors of the report. While default rates are projected to climb, JPMorgan believes that investors will be paid for this risk.
“Historically, credit losses in direct loans have tended to match losses in the high yield and leveraged loan markets,” the report said. “Defaults are a fact of life in leveraged finance, and it is possible defaults will increase further as debt costs rose following rate hikes by the Fed. Still, we think investors may be well-compensated for that risk.”
The asset manager cautioned investors to pay particular attention to the 2021/2022 vintage of loans because they were underwritten with higher leverage and their terms may have been predicated on assumptions of lower interest rates. The team also cautioned investors to avoid asset managers who lack robust and transparent valuation methodologies.