JPMorgan’s private bank has praised the potential of direct lending in the private credit sector, and suggested that the overall private credit market could be worth more than $3tn (£2.4tn).
Preqin has pitched the value of the private credit market at between $1.5tn and $1.75tn. However, a new analysis from JPMorgan Private Bank has claimed that Preqin’s estimates are too low as the data firm undercounts business development companies and doesn’t account for leverage. Taking these factors into consideration, the bank believes that the true size of the private credit market is $3.14tn.
Read more: Private debt AUM passed $1.6trn last year amid “explosive” growth
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 suggested that direct lending would likely deliver annual total returns in excess of 8.5 per cent over the next 10 years, with even higher returns predicted for the year ahead.
Within the direct lending sector, high yield and investment grade spreads are trading at their tightest levels since 2010, the executives said. And while default rates are expected to rise, JPMorgan noted that investors will be “well compensated” for this risk.
Read more: Alternative lenders and private debt funds fill SME funding gap
“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 warned investors to pay close attention to the 2021/2022 vintage of loans as they were underwritten with higher leverage and their terms may have been based on expectations for a lower interest rate environment. The executives also told investors to be wary of asset managers that lack robust and transparent valuation processes.
Read more: Private markets predicted to continue outperforming listed stocks
