Private Credit Chain Reaction: As JPMorgan Chase Cuts Collateral Valuations, Cliffwater's $33 Billion Fund Faces Redemption Crisis

The private credit market is facing a “double squeeze,” with one side being banks becoming more cautious about industry buyback-style financing, and the other side experiencing increased redemption pressures from large funds, putting both liquidity and new lending capacity under pressure.

According to the Financial Times of the UK, citing sources, JPMorgan has lowered the valuation of some private credit portfolio loans, which serve as collateral when funds borrow from the bank.

These adjustments did not trigger margin calls but will limit JPMorgan’s future funding to private credit institutions based on these collateral assets, effectively tightening external leverage in the industry.

Meanwhile, Bloomberg, citing sources, reports that Cliffwater LLC’s flagship private credit product, the Cliffwater Corporate Lending Fund, is facing redemption requests exceeding 7%, surpassing its quarterly redemption cap.

Amid concerns over AI impacts on software, the market is increasingly sensitive to the underlying loan quality and valuation transparency of private credit. The outflow of funds and tightening of financing are already reflected in the stock prices of listed asset management platforms, prompting some institutions to restrict redemptions or use internal funds to meet redemption demands.

JPMorgan leads the tightening, proactively reducing valuations to compress credit limits

According to the Financial Times, JPMorgan has informed multiple private credit lenders that it has lowered the valuation of certain loan collateral, which will directly reduce the amount of repurchase financing available to related funds. This move is a “preventive” measure to reduce available credit, not a passive trigger following defaults or missed interest payments, and thus did not cause margin calls.

The report indicates that the loans with lowered valuations mainly involve software company assets. JPMorgan CEO Jamie Dimon told investors at a closed-door leverage financing meeting last week that the bank will be more cautious in financing backed by software assets.

Troy Rohrbaugh, co-CEO of JPMorgan’s banking and investment banking business, told analysts at the company’s February update that the bank is “more conservative” regarding private credit risks compared to peers, and stated, “As the world becomes more turbulent… this outcome was expected,” and “I’m surprised people are surprised.”

Unlike some peers, the Financial Times notes that JPMorgan retains the right to “revalue assets at any time” in private credit financing agreements, whereas most banks typically require trigger conditions, such as issues with interest payments, to do so.

Cliffwater redemption requests exceed 7%, decision on “5% or 7%” execution pending

Bloomberg reports, citing sources, that Cliffwater Corporate Lending Fund, with assets around $33 billion, currently has redemption requests exceeding 7%.

This fund is structured as a range fund; if investor redemption requests reach a certain threshold, the fund must buy back up to 5% of shares each quarter. When redemptions exceed 5%, the manager may, at its discretion, increase the buyback to a maximum of 7%.

Sources say the redemption window will close on Tuesday, and Cliffwater has not yet decided whether to implement the 5% cap or raise it to 7%.

Founded by Stephen Nesbitt, Cliffwater has recently been under pressure amid broader industry divestment trends. The firm dismisses market concerns over the quality of underlying assets, attributing more of the sell-off to sentiment rather than fundamentals.

S&P Global Ratings awarded the fund an A rating last November, citing high diversification, relatively low leverage, and strong asset quality and cash flow performance.

Software assets and AI concerns become common focal points, with valuation disagreements intensifying

Two pressure points converge on “software loans.” The Financial Times notes that JPMorgan’s recent valuation reductions relate to software company assets, which are perceived as more vulnerable to the AI wave. Meanwhile, Bloomberg mentions that investor concerns over private credit include exposure to software companies potentially disrupted by AI.

The Financial Times also reports that in 2023, public market software stocks and bonds have fallen sharply, while private credit lenders typically hold loans to maturity and have not significantly marked down their book valuations. Private lenders argue that enterprise software companies are still growing and expect loans to perform well, as investors continue to support borrowers.

In this context, more proactive revaluation of collateral by traditional banks could amplify tensions between “public market price signals” and “private valuation stability,” influencing the pace of private credit lending through buyback financing limits.

Redemption and redemption restrictions spreading, impacting manager stock prices

Private credit fund outflows are not isolated. Bloomberg reports that Blackstone last week limited withdrawals from its HPS Corporate Lending Fund to 5%, as redemption requests approached double that level. This marks the first time since recent turbulence that major private credit managers have imposed redemption limits on perpetual funds.

In contrast, Blackstone recently allowed its flagship BCRED fund to experience a record 7.9% redemption, offsetting outflows with approximately $150 million of senior management’s own funds and about $250 million from corporate funds.

Secondary market feedback is also evident: Blue Owl Capital’s stock has fallen 37% this year, and Ares Management’s has declined 33%. When redemption pressures and financing tightening occur simultaneously, investors’ expectations for growth and profit resilience in private credit platforms are more likely to be re-priced.

Leverage funding margins tighten, potentially constraining private credit “lending and return space”

The Financial Times points out that part of the growth in the private credit industry relies on leverage provided by regulated banks, which is crucial for elevating returns into high-yield bonds or leveraged loan funds. Banks like JPMorgan, Wells Fargo, and Bank of America have provided substantial financing to the industry.

At the same time, private credit firms’ fundraising capabilities have significantly increased in recent years. Since late 2020, private credit companies have raised about $400 billion from high-net-worth individuals and attracted more from institutional investors, competing with banks in leveraged buyout financings worth billions.

Within this framework, JPMorgan’s valuation downgrades of collateral to tighten “back-end leverage,” combined with redemption surges in products like Cliffwater, suggest that the industry is increasingly dependent on liquidity management for both sources and uses of funds. Investors will pay closer attention to redemption mechanisms, valuation methods, and collateral re-pricing effects.

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