JP MORGAN IS DUMPING $4B OF PRIVATE CREDIT LOANS AS DEFAULTS HIT RECORD HIGH -BAG HOLDERS TRAPPED

Added: 2026-05-23

[00:00:00]So CNBC reported yesterday afternoon that private credit defaults have hit a record high. Fitch says defaults have reached the highest level that they've recorded in this market. And just said that private credit defaults reached 6% in April, the highest level since they began tracking the market in August of 2024.

[00:00:24]And according to a story out of the Financial Times yesterday, private credit is now sitting on, according to them, $3.8 trillion of backlog in unsold companies. That number is a lot bigger than the public's been told for going back at least six months now. This person Jeta Capadia, chief investment officer at Forom University said the buildup of unreturned capital has reached almost like a breaking point.

[00:00:57]So, I wasn't surprised this morning uh when I see a story out of Reuters that none other than JP Morgan is seeking to offload risk tied to more than $4 billion of loans that it made to private credit and private equity funds. It says JP Morgan is in talks with bag holders, did I say bag holders? I'm sorry. or I meant to say investors over a transaction that would allow it to transfer risk tied to net asset value loans backed by private equity fund assets. The deal says would allow JP Morgan to retain the net asset value loans on its balance sheet while shifting the risk or a portion of the risk to uh the of the risk of losses to the investors. So, we're talking about here the same private credit that for years has been sold as safe, has been sold as uh less volatility than public markets, outsiz returns. But listen, everything I think is now changed. The banks are trying to escape what they know is coming. The private credit companies are also trying to escape by using an old trick known as the continuation vehicle. And now what they're doing is they're stacking these continuation vehicles for the same zombie company projects. A new term has emerged in private credit, which I'll get to in a second, called CV squared.

[00:02:29]Stands for continuation vehicle squared.

[00:02:32]And I'll explain what that shell game uh is here in a second. Please don't forget to hit that subscribe button for me. And for those that want to get on board for my monthly newsletter, check out the link to the risk map. I'll leave it in the description below. So, keep in mind these private credit defaults have reached the highest levels since Fitch started recording it. Not during a financial crisis, not during a recession, although many people would argue that we're in a recession, but here's what's going on. the companies to which these private credit uh funds lent money for the past five years. Of course, your money being uh or the money being your 401k money, your pension fund money, they were zombie companies. They had no revenue. Okay, the gamble private credit was making is that rates would stay low or even go lower and that would let's say allow these companies, the borrowers, the zombies to retire the debt or worst case scenario refinance the debt. But they've lost that bet big time. Now the math is becoming impossible for many of these borrowers because a lot of these uh loans are floating rate loans and because interest rates have been going up. And if you're following the news and what's going on uh with the Fed, uh these rates are unlikely to come down anytime soon from my perspective. So cash flow that once covered the debt payments no longer does. That's why you're also seeing a rise of these non-accrual loans we've been covering as well. So refinance is not just more difficult, it's basically impossible now. And the zombie companies are not marketable. They can't be taken public by the private credit companies.

[00:04:18]And this goes back to uh the unreturned capital reaching a breaking point from that quote I shared above. So let's say Interstage left the continuation vehicle. I've touched on this uh in past shows. It's nothing but a shell game, folks. And now the problem gets um let's say they're trying to solve the problem by sweeping it under the rug, but it's going to be made worse. So let me lay out kind of an analogy for you. Um, imagine that you own, let's say, an apartment uh building with some investors. You're the manager of the project. You believe it's worth $100 million, but every buyer who's looking at it says they won't pay more than $70 million. Okay? So, if you sell it today at 70 million, you take that loss. What else happens? Your investors take that loss. It triggers requests for their money back and your and your reputation, you know, goes in the tank. So instead of selling this property outright, you set up a new investment vehicle. Okay?

[00:05:19]And you just simply transfer the project. I'm not calling it an asset on purpose, the project to the new vehicle.

[00:05:26]And what happens is some of the uh existing investors will stay on board, some will leave. And then you'll also, you know, talk in new investors with promises of these lofty returns. So the asset that um you believe is worth $100 million really worth $70 million remains owned in your your ecosystem just through a newly labeled entity or fund.

[00:05:50]So what it does it delays price discovery. Instead of selling the asset and finding out what exactly somebody will pay for today, it continues living inside the new structure. Instead of just using a single continuation vehicle, they're now using more than one. And that's where they're coming up with this new industry term called CV squared. So rather than accepting the reality, they just keep kicking the can.

[00:06:14]Quote, "It's a dangerous strategy to invest in continuation vehicles, expecting that you need another one to get out," said Jeff Acres, head of secondary investments at Adam Street Partners, a private markets investment manager. A survey by Call Your Capital found, listen to this, 24% of institutional investors um had seen assets transferred to a second continuation vehicle while 38% expected this to happen over the coming 12 months. And this is where things become even more frightening. Every financial cycle creates a new buyer. Someone always has to purchase and step into the risk. Someone always has to come in and pro provide let's say the liquidity. The question is who? So if these defaults now are hitting record levels, you would ask well what investor or why would a new investor want those assets. Okay, they're they become the new bag holders.

[00:07:13]You guys have all heard of the greater fool theory, right? So you would wonder what kind of investor would ever do that. And let me close with this and it'll answer the question. an FT uh the FT article said that investors are open to the idea of CV squared so long as one day they can exit with fair value.

[00:07:37]Okay, that's according to one executive who was not authorized to speak publicly at here we go a US state pension fund that agreed to roll over its stakes from an expiring continuation vehicle into a new one just last year. So I'm going to close with that because it's a whole another show that'll be the subject for tomorrow. So stay tuned. Uh, if you guys enjoy the content, leave me a like on the video. Uh, please subscribe to the channel and go check out my newsletter.

[00:08:11]Make sure you share this material with people. Please get the word out. Leave me your thoughts and comments on uh on this. And with that being said, I'll talk to all of you soon. Thanks.