This Year's Pullback Sets Up a Better Direct Lending Vintage

What's New

This year's pullback in private credit has started a better vintage for direct lenders. Jeff Bracchitta, Head of Private Credit at J.P. Morgan Asset Management, argues this in a conversation with Aaron Mulvihill on Alternative Realities. Redemptions and bad headlines forced some managers to step back. Pricing is now at least 50 basis points wider than last year, with tighter leverage. Allocators should commit to this vintage and favor managers that held back during the run-up.

Why It Matters

Most coverage treats this year's redemptions and software losses as damage to the asset class. Bracchitta reads the same pullback as a correction to the supply-demand imbalance that eroded terms. Managers that raised too much competed with the syndicated loan market and accepted thinner pricing. Those firms now face fallout, while disciplined lenders get paid more for less risk. J.P. Morgan is building a direct lending business in asset management, so a favorable read of the vintage supports its launch.

Between The Lines

Bracchitta's case for J.P. Morgan rests on sourcing. He says most private credit originators call on the same private equity sponsors, which concentrates portfolios quickly. J.P. Morgan's borrowers want banking services beyond the loan, which he says widens the opportunity set and lets the firm be choosier. The bank has committed about $50 billion of its own balance sheet to direct lending. The pitch implies that managers without a bank behind them will struggle to diversify.

Memorable Quotes

• "We try not to lean too heavily into periods of excess." The discipline he says separates managers through a cycle.

• "Pricing in the market is at least 50 basis points higher than it was last year." The evidence behind his vintage call.

• "I do think we could see some over leveraged balance sheets, or balance sheets that end up being over leveraged in the context of higher rates." An admission that last year's deals carry risk if rates keep rising.

• "What we're seeing now is the start of what really is a better vintage in the market." The thesis in one line.

The Wrap

His call depends on discipline outlasting the fundraising rebound. Wider pricing holds only while capital stays scarce enough for lenders to keep terms tight. Further rate hikes would test deals underwritten at last year's leverage. Borrowers are better hedged than in 2022, which gives the vintage some protection. Default rates on 2026 loans over the next 3 to 5 years will settle the question.