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Opinion Private credit
JPMorgan’s private credit partners have limited ability to turn down deals
by Lisa Lee
Lisa Lee
Deputy editor
Creditflux
As asset managers win market share in direct lending, JPMorgan and Citigroup are trying different ways of working with them
The saying “Keep your friends close and your enemies closer” has oft been credited to Chinese general and military tactician Sun Tzu. Others cite The Godfather Part II. Whatever the origin, Wall Street banks are embracing the strategy in response to the seismic shift ushered in by the rise of private credit.
Two of the stalwarts of corporate lending, JPMorgan and Citigroup, are embarking on partnerships with asset manager upstarts to expand their reach into the USD 1.7tn market. The difference in their approach is illustrative in showcasing the challenges to these deals.
In JPMorgan’s case, the world’s fifth largest bank is banding together with a coterie of funds. Thus far, it has signed on FS Investments, Shenkman Capital Management and Cliffwater. The hope on JPMorgan’s part is to add more and build a roster of private credit partnerships.
Citigroup, on the other hand, is embracing just one partner. The world’s 12th largest bank has entered into an exclusive agreement with an alternative asset manager titan — Apollo Global Management. There are others included in the programme, but they are linked to Apollo in some way. Middle Eastern powerhouse Mubadala Investment Company has joined as Apollo’s strategic partner, and Apollo’s own insurance subsidiary Athene has the option to co-invest.
Citigroup signed a big deal
Of the two deals, the tack by Citigroup brings massive firepower right off the bat. The agreement is startling for its sheer size. The headline figure of USD 25bn for direct lending in North America will be deployed in the next several years. If there’s robust demand for the debt, the duo have the flexibility to “significantly” increase the amount and expand the geographic reach. Partnering with one of the biggest names in finance — which has transformed itself from a private equity giant to the leading alternative credit manager — allows for such a move. Add in Mubadala and Athene’s capital and Citigroup bankers have plenty to offer clients looking to take on borrowings in private credit.
JPMorgan has opted to tie up with partners of far smaller scope and scale. While well-regarded in their sphere, FS Investments, Shenkman Capital Management and Cliffwater do not number among the titans of private credit. Tot up the trio’s assets under management and the combined sum comes to a mere fraction of Apollo’s.
Was Jamie Dimon’s bank outdone by Jane Fraser’s Citigroup? Perhaps on first blush.
Dig a bit deeper and JPMorgan’s path makes some sense. JPMorgan keeps more control than in other such partnership agreements. Its bankers not only source and originate the loan opportunities, they are also the front-facing lender to the corporate borrower, according to sources familiar with the matter. If something goes poorly with the loan, JPMorgan is in the forefront to manage the troubles and weigh how to handle the relationship with the client, explain those that have negotiated with JPMorgan.
JPMorgan has kept control
Beyond the client relationship, JPMorgan is also driving the initial debt transactions. Its private credit partners have limited ability to turn down deals, with only a handful of refusals allowed over a period of time. While there’s alignment of interest – JPMorgan is taking about 50% of the commitment alongside the private credit funds – here again JPMorgan is in control.
For the larger private credit funds, these terms were too onerous to reach any partnership with JPMorgan, according to sources. Some walked away from negotiations with JPMorgan because they wanted to drive the underwriting process, reject any number of deals and manage the loan afterwards, according to sources. Any further JPMorgan partnership with other asset managers is unlikely to be with the largest private credit shops for these reasons, the sources added.
But JPMorgan’s approach is novel — and it is one that other banks should consider. Regulators are forcing banks to pare back from risk-taking in lending. Particularly in direct lending, the biggest sphere in private credit, investment banks that have traditionally earned rich fees from arranging and syndicating debt in the high-yield bond and leveraged loan markets have been losing market share to private credit funds.
The nub is that if they want to retain control like JPMorgan, they will have to utilise their balance sheet like them as well. And they may not have huge capital to deploy.
