JPMorgan is reportedly looking to offload risk tied to over USD 4 billion in loans linked to private equity funds. The news comes amid the indications of weakening investor sentiment toward private credit, as concerns mount over loosening lending standards and the potential for AI to disrupt the software sector, a key area of exposure for many funds.
“The lender is in talks with investors over a transaction that would allow it to transfer risk tied to ‘net asset value loans’ backed by private equity fund assets,” reported the Financial Times.
Under the Wall Street bank’s new strategy, it will initiate a risk transfer that would allow it to retain the NAV (Net Asset Value) loans on its balance sheet while shifting a portion of potential losses to investors.
“The bank is looking to shift up to 12.5% of losses on the pool, with investors offered a low-teens return for taking the first-loss position. The terms remain fluid,” the Financial Times reported further.
JPMorgan’s NAV pool spans dozens of facilities lent to private equity funds across North America, Europe, and the Middle East, providing a broad cross-section of sponsor exposure rather than a concentrated bet on any single manager.
“Sponsors have leaned heavily on NAV financing to return capital to limited partners or to inject growth funding into portfolio companies while waiting for a more constructive disposal environment. Secondary buyers of fund stakes have also used the product to lever their returns. The result has been a sharp build-up of fund-level leverage layered on top of the debt already sitting at portfolio companies,” reported Private Equity Insights.
NAV loans are pitched as low risk on the basis that they are collateralised by diversified pools of fund assets. Borrowing on the NAV front gets generally capped at around a quarter of net asset value.
However, a prolonged slowdown in loan realisations, along with concerns over AI potentially disrupting the valuations of software-heavy portfolios, has put a question mark on the NAV loans’ “low risk” status itself.
Regulators in the United States and Europe have already flagged the “leverage over leverage” risk, while market participants are questioning whether NAV borrowings were getting used to prop up portfolio companies beyond a fund’s formal investment period, in order to “flatter reported performance”.
Apart from JPMorgan, Mitsubishi UFJ Financial Group is also pursuing a similar risk transfer tied to loans extended to listed private credit funds. These developments suggest that synthetic offload structures are becoming the new normal for banks when it comes to trimming sponsor-related exposures without exiting client relationships.
However, global asset-management firm AllianceBernstein doesn’t see the moves by JPMorgan and Mitsubishi UFJ affecting the NAV lending’s future, as the industry, which currently sits at roughly USD 100 billion, will likely touch the USD 350 billion mark by 2030.