As regional bank stress continues, and inflation keeps rates high, the picture for private credit is only getting brighter. Tighter bank lending means more opportunities for private lenders to lend and make outsize returns on their loans.
Whether that's a good thing depends on who you ask. Financial industry titans Jamie Dimon and Marc Rowan have been trading opposing views on the burgeoning sector for the last year. Dimon, CEO of JPMorgan Chase, often speaks skeptically about the rise of non-regulated, non-bank lending, which he says carries underappreciated risks. Rowan, CEO of private-credit leader Apollo, however, has been on a year-long tour extolling the benefits of the growing ecosystem.
The verbal sparring came to a head this week at the Bernstein Annual Strategic Decisions conference in New York City when Rowan was asked to respond to Dimon's comments —from a day earlier —that "there could be hell to pay" if the private-credit industry starts to crack.
Last year, Rowan responded to Dimon's comments that higher capital requirements for banks had private lenders like Apollo "dancing in the streets." The back-and-forth underscores a growing fascination with the nascent private-credit sector, which has grown from 2% of the capital that leveraged companies borrowed in 2012 to more than 20% as of September 2022 according to Bank of America Global Research.
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Rowan on Thursday responded by saying that the private-credit industry helps reduce systemic risk caused by the traditional banking industry.
"Jamie is an amazing representative of the banking industry," Rowan said. "But every dollar that moves out of the banking industry and into the investment marketplace makes the system safer and more resilient and less levered."
Rowan explained that the typical bank is leveraged ten to twelve times and that moving money out of that system, and into private investment platforms, helps reduce systemic risk."It is deleveraging. It makes the system more resilient," he said. "This is math, this is not Marc Rowan speculation."
"Governments around the world, for the reasons I have just stated, are on the margins asking banks to do less and investors to do more," Rowan added.
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The back and forth started in July, when Dimon noted on the firm's earnings call that rising bank regulations would be great news for nontraditional lenders like Apollo and Blackstone.
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"They're dancing in the streets," Dimon said, noting that these non-bank lenders don't have the same strict regulation regimes about how much capital they keep on their balance sheets.
Rowan responded in August during Apollo's earnings call, saying that the relationship between banks and nonbank-lenders is "very symbiotic."
"While some talk about the dancing —of this being a great time for private credit — I've noticed that there's actually been dancing on both sides," Rowan said.
Even though nonbank lenders are taking over some banks' lending, Rowan said private lenders are focused on the underlying asset and the loan itself, compared to the bank, which is focused on retaining a customer. This means that banks will still have many different forms of revenue from a client, even if they aren't making it from lending directly.
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Dimon on Wednesday noted that some private-credit operators are "brilliant" and that they do necessary work for the economy. But he warned that the boom has also opened the door to some bad practices that could eventually hurt Main Street investors.
"You have illiquid products. Maybe they're not properly marked. They have not been stress-tested," he told the crowd at the Bernstein conference. "I've seen a couple of these deals that were rated by a rating agency. And I have to confess, it shocked me when they got rated," he added.
Dimon said he doesn't see systemic risks, but rather problems for everyday investors who are becoming more exposed to private credit as an investment. "The problems in financial markets are often caused by the 'not good one,' the people that make the mistakes," Dimon said.
When Rowan was asked about Dimon's remarks, he agreed with Dimon that losses could occur.
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"There are lots of ways to lose money," he said. "You can make bad investments, but at the end of the day, individuals have moved to levered private credit below investment grade because they see returns there that are equal to or better than equity returns with less risk than equity."
"So Jamie is not wrong that there could be losses. There can be losses on any asset where you are reaching for return," he said. "Good managers will produce better outcomes than bad managers. Vintages in 2022 and 2023 will likely be better than 2024."
