At the AllianceBernstein Strategic Decisions Conference on Wednesday in New York, Jamie Dimon sounded more like one of his counterparts at the IMF than the CEO of JPMorgan Chase in his warnings about the potential issues that could stem from the industry.

“The problems in financial markets are often caused by the not-good ones. The people who make mistakes,” he went on to further say.

First things first: Dimon is not a nay-sayer on private credit. His own firm has attempted to get in on the action either through partnerships with lenders or as more recently reported outright buying a peer.

More broadly, Dimon says, the ‘buy-and-hold’ model of private credit means investors are more committed to their borrower’s long-term success than short-term gains — something that is overall a good for the market. He also said that many of the people he knows in private credit, people he works with and banks for, are brilliant.

Where his concerns zeroed in on was how lenders are marking their books. For in the absence of an active secondary trading market in private credit loans (though that is changing) all we have is the opinions of the manager themselves and the third-party valuator they hire.

“You have illiquid products. Maybe they’re not properly marked, [but] they have not been stress tested. Do people really fully understand what I said about interest rates affecting what these things are worth? Do they?”

The impact of the steepest increase in rates in decades has largely been shrugged off by private credit markets. Valuation resilience is often thought of as an advantage for direct lenders (see here), although the model has attracted its fair share of critics, as private lenders seemingly are not marking loans in accordance with the heightened risk in the economy.

Dimon, it turns out, is one of those critics.

There is a lack of “transparency around the marks…I’ve seen a couple of these deals that were rated by a ratings agency, and I have to confess, it shocked me what they got rated,” he said.

Hell lent

Today, it is a tougher environment for private credit firms to do deals, but for years post-GFC, private credit firms were able to post handsome returns with few losses. It was a benign lending market.

LPs bemoaned the difficulty in selecting managers over this period, but it does appear to be getting easier to distinguish as times get tricker, as 9fin recently reported. Manager dispersion has increased as the pressure of higher rates has created starker differences in fund performance. Yet if LPs with their consultants struggled, your average retail investor is likely to have a tougher time selecting the right managers.

For one of Dimon’s chief concerns specifically was the broadening of access of the private credit investment strategy to more retail investors that has taken place over the last two years. A huge number of private credit firms launched private BDCs to chase retail money, and at the beginning of the year some vehicles were publicly listed, so the likes of you and me could buy exposure on apps such as Robinhood or take the more traditional approach and call a broker.

Some of these include BDCs from Morgan Stanley and Palmer Square, which both went public earlier this year. They were joined by Churchill and Blue Owl, who also took advantage of the improved public market sentiment that developed early in the year by going public with their BDCs.

It’s not just public BDCs either, since non-traded BDCs have seen their assets nearly triple in value over the past two years, providing a meaningful boost to the growth of the investment vehicle’s popularity and usage.

Yet there may be unintended consequences for those lenders going down this route, Dimon warns. The retail investor has the ear of regulators and politicians.

“If a little old lady finds out that she can’t get her money back, there may have been disclosures saying ‘this money is locked up for five years,’ but you know what, retail clients tend to circle the block and call their senators and congressman and there could be hell to pay.”

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