Wall Street giants take the lead: JPMorgan lowers valuation of private credit collateral and tightens lending leverage

JPMorgan Chase is sending a cautious signal to the private credit industry. The largest bank on Wall Street has proactively downgraded the collateral valuations of some loans held by private credit funds, particularly those loans to software companies deemed vulnerable to the impact of artificial intelligence.

According to the Financial Times, JPMorgan has notified private credit institutions that it has marked down the value of some loan portfolios used as collateral for borrowing, with the impacted loans concentrated among software companies. This move directly limits JPMorgan's future capacity to provide financing to private credit funds using these loans as collateral. Reportedly, CEO Jamie Dimon told investors at a closed-door leveraged finance meeting last week that the firm is taking a more prudent approach toward financing activities related to software assets.

Sources familiar with the matter stated that the valuation markdowns have not yet triggered any margin calls for the funds and are considered a precautionary measure aimed at proactively reducing available credit lines for the affected funds.JPMorgan's Co-Head of Commercial and Investment Banking, Troy Rohrbaugh, said at an analyst meeting in February that the bank was becoming more conservative on private credit risk exposure than its peers. "As the world becomes more volatile... this outcome is to be expected," he said, "I'm surprised people are shocked."

Currently, private credit industry executives say they have not seen other banks take similar actions, making JPMorgan a unique example. This set of actions is seen by the market as a signaling warning from a Wall Street giant about the credit quality in the private credit industry.

According to the Financial Times, the loans subject to markdowns are concentrated among software companies, which are widely believed to be especially vulnerable in the context of the rise of artificial intelligence.

Public markets have already reflected these concerns—software stocks and related debt have suffered significant declines this year. However, private credit firms typically hold loans to maturity, so their portfolios have not shrunk in sync with the public markets, resulting in a notable valuation gap.

Some affected loans date back to the period when high valuations in the software industry were driven by the remote work trend. At that time, Thoma Bravo completed its $6.4 billion acquisition of customer service software company Medallia, and Hellman & Friedman undertook the $10.2 billion leveraged buyout of Zendesk. The associated debt will come due gradually over the next few years, but the market conditions are now very different from when the deals were made.

Private credit institutions remain cautious, arguing that enterprise software companies are still growing and investors continue to support borrowers, so they expect the loans to perform as usual.

In terms of mechanism, JPMorgan has certain distinct features in the private credit financing market.

According to a sample credit financing agreement reviewed by the Financial Times, JPMorgan reserves the right to revalue collateral assets at any time; in contrast, similar provisions at most other banks usually can only be triggered by credit events, such as missed interest payments by borrowers.

JPMorgan’s loan valuations take into account both asset-specific analysis and macroeconomic factors, and reference public market proxy indicators, including investment vehicles that purchase private credit loans and occasional comparable private transactions. “The key is to act in advance, not to wait for a crisis,” said one source familiar with the process.

Private credit funds can challenge the markdowns, but this process could take months and typically requires the involvement of third-party valuation firms. During the period of dispute, JPMorgan’s valuation remains effective. JPMorgan declined to comment on the matter.

The rapid expansion of the private credit industry largely depends on leveraged financing from regulated banks, which is a key factor enabling the industry to outperform high-yield bond or leveraged loan funds in returns.

Since the end of 2020, private credit firms have raised about $400 billion from wealthy individual investors, and hundreds of billions more from institutional investors. This has allowed them to make larger loans and participate directly in multi-billion-dollar leveraged buyouts, competing head-to-head with traditional banks.

Major Wall Street institutions—including JPMorgan, Wells Fargo, and Bank of America—have all provided significant financing to the private credit sector. Part of the appeal is that regulations allow banks to reserve less capital for these activities, making them far more capital efficient than direct loans to end borrowers.

Currently, private credit industry executives say they have yet to see other banks adopt the same stance as JPMorgan. “In the past three months, they've become much harder to deal with,” one fund head said of JPMorgan’s willingness to provide back-end leverage. “JPMorgan rarely gets ‘anxious’—this is the first time we've had any trouble.”

Troy Rohrbaugh’s earlier remarks indicated this shift. He hinted that, as the macro environment grows more volatile, the bank’s cautious approach is the result of thoughtful deliberation rather than hasty reaction. With significant uncertainties still looming over software asset valuations and the impact of AI, JPMorgan’s actions could become an important indicator of changing risk appetite among Wall Street’s major banks.