Private credit blows up, JPMorgan makes money on both sides: acting as creditor and helping others short.

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The crisis in the software industry is driving the private credit market toward a massive liquidation, with JPMorgan playing a rare dual role—being both one of the largest sources of funding for the sector and proactively providing clients with short-selling channels for related assets.

This Monday, Apollo Global Management encountered a substantial wave of redemption requests, marking the latest development in the ongoing crisis. JPMorgan CEO Jamie Dimon has ordered a comprehensive review of all loan books across the bank, assessing exposure to software companies and has restricted credit permissions for some private credit funds due to their software risk exposure. Meanwhile, the bank has recently created short-selling strategies for investor clients, such as hedge funds, targeting private credit-related exposures.

In terms of market impact, shares of alternative asset managers Blue Owl, Ares, and Blackstone have each fallen by more than 30% this year, while the S&P Select Software & Services Index is down about 20%, and the KBW Nasdaq Bank Index has also dropped 8%.

This crisis reflects deep-rooted tensions between major banks and the private credit industry: private credit firms are not only Wall Street’s largest paying clients, but also direct competitors to banks. JPMorgan’s Co-Head of Commercial & Investment Banking, Troy Rohrbaugh, admitted last month: "They are all our clients, but what surprises me is that people are actually surprised by the current situation."

Software sector under pressure: “SaaS Apocalypse” triggers private credit crisis

The heart of the crisis lies in the over-concentration of private credit funds’ exposure to the software industry. For years, numerous unprofitable software companies have obtained high-risk loans via private credit funds; now, with rapid advances in artificial intelligence, investors worry about disruptive replacement in the software sector. Combined with several high-profile defaults and blocked redemptions, the turmoil has been dubbed “Saaspocalypse.” Individual investors are scrambling to withdraw from private credit funds, and many institutions have had to limit redemption requests.

JPMorgan estimates that the software sector accounts for about 30% of the total outstanding private credit loans, while banks’ equivalent debt is just about 10%. This stark gap is one fundamental reason why private credit funds have been much harder hit than traditional banks in this crisis.

Dimon's double calculus

Dimon has long had a cautious attitude toward the private credit boom, but he also allows JPMorgan to deeply participate so as not to lose its competitive edge in the business of large private equity clients. Currently, the bank has allocated $50 billion of its balance sheet resources for private loans to clients.

According to media reports citing insiders, Dimon has tracked risks in the private credit market for years, with bankers regularly briefing him about developments concerning problematic fund managers. Last year, he hinted that “cockroaches” lurked within the financial system; recently, as AI tools rapidly evolve and threaten to eliminate many software firms, his concerns have escalated further.

"Honestly, you’ll be shocked by what these people have gone through in software—we review loans and names one by one to see what it means for us and try to make forward-looking predictions," Dimon said at an investor event in February.

The Wall Street Journal reports that other banks have also recently started a new round of reviews of their private credit exposure, including comprehensive re-evaluations of loan portfolios and collateral quality.

Entangled Interests: Banks’ dilemma

JPMorgan isn’t the only bank sensing short-selling opportunities. Bank of America also created short-selling strategies for clients targeting private credit-related stocks, but quickly withdrew and issued a public apology. Its analysts later attributed ongoing market declines to "media attention."

Wells Fargo banking analyst Mike Mayo stated: "It’s an extremely sensitive topic, but market turmoil might give banks an opportunity to launch attacks on their competitors."

Since the financial crisis of 2008-2009, private credit has steadily eroded the market share of major banks. Banks such as JPMorgan and Goldman Sachs have lent billions directly to private credit funds and launched their own private credit initiatives, making the entangled interests increasingly complex. Any aggressive action risks putting them in a dilemma.

Loan sales impeded: The two fates of Qualtrics and EA

The crisis has already had direct impacts on specific transactions. JPMorgan faced significant hurdles in debt sales for technology companies associated with leading private equity firm Silver Lake.

According to media reports citing insiders, the bank recently decided to postpone the sale of about $5 billion in debt of the cloud-based subscription software platform Qualtrics. Investors are demanding extensive customer retention data before committing new capital, and this material is still being prepared.

Meanwhile, Electronic Arts (EA), which launched a sale of about $8 billion in bonds this Monday, ultimately received strong demand. At JPMorgan’s leveraged finance conference held in Miami this month, investors had expressed concerns about how artificial intelligence might threaten EA; but according to reports, bankers responded that it was unlikely AI would replace a gaming studio with multiple sports league licenses.

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