Private Debt News Weekly Issue #72: Cockroach Wars, Mark-to-Myth, and the IMF Loses Sleep

Dimon and Lipschultz trade public barbs as academics shred returns, prosecutors file fraud charges, and the IMF chief admits sleepless nights

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The gloves came off this week when Jamie Dimon used JPMorgan’s $170 million Tricolor loss to suggest there’s never just one cockroach in credit markets. Marc Lipschultz of Blue Owl fired back immediately, telling Dimon to look for “cockroaches closer to home” since banks led both Tricolor and First Brands deals.

According to Lipschultz at the CAIS Summit, “there are people who have meaningful, parochial interests in the industry not continuing to grow and succeed.” Translation: Blue Owl’s market cap now exceeds most financial institutions globally, “and of course those people don’t like it.”

The clash escalated when regional banks proved Lipschultz’s point. Zions disclosed a $50 million loss on two commercial loans, dropping 11% before recovering. Western Alliance revealed a fraud lawsuit over a Cantor Group credit line, sliding 10%. Jefferies, with $715 million First Brands exposure, saw its stock slump before clawing back ground.

Then the real ammunition arrived. Academics from Johns Hopkins and UC Irvine published research calling the industry’s returns “illusory” and accusing managers of “mark-to-myth” accounting. According to the Journal of Private Markets Investing study, direct lenders offer marginal returns compared to leveraged loans, underperforming in two of six years analyzed.

Kristalina Georgieva, IMF managing director, admitted that risks in non-bank lending represent “the question that keeps me awake every so often at night.” Speaking at the IMF’s annual meeting in Washington, she urged countries to pay attention to the “very significant shift of financing” from regulated banks to shadow lenders.

Manhattan prosecutors charged 777 Partners co-founder Josh Wander with fraud for allegedly cheating lenders out of almost $500 million using fake documents and double-pledged assets. S&P warned that insurers hold $218 billion in privately-rated credit with limited transparency. BDC bond spreads exploded, with concessions more than doubling from 3-5 bps in January to over 12 bps currently.

Yet Moody’s Marc Pinto told CNBC “one cockroach does not a trend make,” while Lawrence Golub insisted at the Forbes/SHOOK Summit that private credit is “for sure not a bubble.”

Let’s dive in.

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Key Market Themes

1. Dimon-Lipschultz War Goes Nuclear

Jamie Dimon used JPMorgan’s $170 million Tricolor loss to suggest there’s never just one cockroach in credit markets, comments widely interpreted as targeting private credit. According to Dimon’s analyst call remarks, “we don’t know everyone’s underwriting standards” and he expects “higher than normal downturn type of credit losses in certain categories.”

Marc Lipschultz of Blue Owl fired back sharply at the CAIS Alternative Investment Summit, noting that both Tricolor and First Brands involved bank-led transactions. According to Lipschultz, “there are people who have meaningful, parochial interests in the industry not continuing to grow and succeed,” adding that “Blackstone’s market cap exceeds the market cap of most financial institutions in the world today.”

When interviewer Dani Burger suggested “those people” might be Dimon, Lipschultz smirked and called the focus on private credit “an odd kind of fear-mongering.” According to John Cortese of Apollo, “the notion of never letting the facts get in the way of a good story may have gone a bit too far here” since “these businesses were clearly funded by banks and the public markets.”

Industry Defense Mobilizes

Blackstone President Jon Gray reinforced the counterattack, stating “neither of these are what you think of as direct lending or the traditional private credit market.” According to Carlyle CEO Harvey Schwartz at CAIS, “private markets get referred to often as sort of like the shadow” but “I’ve never seen a shadow this bright ever in the history of time.”

2. Regional Banks Prove Lipschultz’s Point

Zions Bancorp disclosed a $50 million loss on two commercial loans Thursday, sending its stock down 11% before recovering somewhat. Western Alliance slid 10% after revealing a lawsuit alleging a fraudulent credit line to Cantor Group V LLC, though both stocks have since partially rebounded.

The regional bank losses came days after JPMorgan disclosed its $170 million Tricolor hit, suggesting credit problems extend well beyond private credit into traditional banking. According to market participants, the revelations triggered fears that danger could be more widespread than initially understood.

Jefferies, holding debt tied to First Brands, saw its stock slump as questions mounted about what went wrong, though it has since clawed back ground. According to the bank’s disclosures, it has $715 million exposure to the car parts supplier while placing billions of additional First Brands loans with other investors.

Mutual Vulnerabilities

According to Akshay Shah of Kyma Capital, “there’s land mines starting to go off everywhere” with problems emerging in both banking and private credit corners. Shah noted that “Marc is saying it’s in the banking corner, and Jamie might say it’s elsewhere” but “I would say it’s going off in both corners.”

3. Academic Study Demolishes Performance Claims

Academics from Johns Hopkins and UC Irvine argue that private credit returns are “illusory” in research published in the Journal of Private Markets Investing. According to the study analyzing 262 North American private debt funds, direct lenders offer marginal returns compared to leveraged loans, underperforming in two of six years on a TVPI basis.

The research questioned how funds account for “residual value” of unrealized loans, finding that funds originated in 2015 derived 30% of their value from residual investments in 2024. According to Jeffrey Hooke, one of the study’s authors, “private credit performance is both lacking in alpha as well as a timely return of capital.”

According to the academics, “mark-to-myth” accounting of unrealized gains “raises serious questions about the transparency, accuracy, and inherent riskiness of reported performance metrics.” The study used Invesco’s leveraged loan ETF as a benchmark, comparing TVPI returns rather than the industry-preferred IRR metric.

Industry Defense

According to Jillien Flores of the Managed Funds Association, private fund managers “implement robust internal controls and board-approved procedures, supported by independent pricing experts.” However, according to Zain Bukhari of S&P Global Market Intelligence, “valuations can vary significantly and have been a frequent source of contention in the industry.”

4. IMF Chief’s Public Anxiety Validates Concerns

Kristalina Georgieva admitted that private credit risks represent “the question that keeps me awake every so often at night” during the IMF’s annual meeting in Washington. According to the IMF managing director, the fund is concerned about the “very significant shift of financing” from regulated banks to non-bank financial institutions.

The IMF warned this week that growing bank exposures to NBFIs create concentration risk, with banks increasingly lending to private credit funds because these loans deliver higher returns on equity than traditional lending. According to the fund’s assessment, adverse developments at NBFIs “could significantly affect banks’ capital ratios.”

Georgieva urged “more attention to the non-bank financial institutions” given their lighter regulation compared to banks, cautioning the world could end up “in a difficult place” if the sector continues growing significantly and the economy weakens. According to her remarks, the IMF is “being very watchful” though “so far, not that many cockroaches” have emerged.

Systemic Risk Assessment

According to the IMF’s analysis, many countries have exhausted fiscal buffers with little budget headroom to handle a financial crisis, while central banks still battle inflation. The fund also cited “stretched valuations” in stock markets as concerns if AI enthusiasm doesn’t deliver results.

5. 777 Partners Fraud Charges Shock Industry

Josh Wander, 777 Partners co-founder, was charged with conspiracy and fraud for allegedly cheating lenders and investors out of almost $500 million. According to Manhattan federal prosecutors, Wander lied and used fake financial documents to inflate the firm’s finances beginning in 2018.

The firm’s former CFO Damien Alfalla pleaded guilty and is cooperating with prosecutors, according to FBI statements. According to the indictment, Wander misused loans for structured financing to cover riskier acquisitions and expenses, telling employees to alter bank statements to inflate assets.

777’s failed Everton FC acquisition unraveled after Bloomberg revealed in May 2024 that lenders accused the firm of borrowing against $350 million of assets that either didn’t exist, weren’t owned, or were already pledged to other creditors. The SEC filed parallel civil charges against the firm, Wander, Alfalla, and co-founder Steven Pasko.

Due Diligence Failures

The fraud charges validate concerns about lender due diligence and monitoring capabilities. According to market observers, the case demonstrates risks when lenders accept representations without verification, particularly in complex structured financing arrangements involving multiple asset pledges.

6. S&P Warns on Insurance Complexity Risks

S&P issued warnings about risks from complexity and lack of disclosure in private credit markets as US insurers push deeper into the asset class. According to Carmi Margalit, S&P’s head of North American life insurance, “there’s just a lot less transparency” about private credit assets.

The agency estimates that $530 billion, or approximately 23% of life insurers’ corporate bond holdings were issued through private placements rather than public offerings. Of these, about $218 billion had “private letter” credit ratings—confidential scores available only to issuers and some investors.

According to S&P’s analysis, private credit delivered up to 200 bps in additional yield for insurers compared to similarly rated public bonds, but at the cost of increased illiquidity and complexity. One insurance asset manager told the Financial Times: “I literally had an insurance company say to me: ‘If we can get 10 extra basis points of illiquidity premium or complexity premium over public, we want it.’”

Structural Concerns

According to S&P’s assessment, understanding middle-market CLO risks requires analyzing underlying loan credit stress, industry and geographical distribution, CLO structure, and how stress manifests in individual tranches—”and that’s a relatively straightforward example.”

7. BDC Market Stress Intensifies Dramatically

BDC stocks hit multi-year lows while bond spreads widened to levels unseen since April’s tariff turmoil. According to Bloomberg analysis, concessions on newly issued BDC bonds more than doubled from approximately 3-5 bps in January to over 12 bps currently.

The selloff eased slightly this week, but according to Michael Anderson, Citigroup’s global head of credit strategy, “ultimately, a lack of transparency means we don’t know what’s happening in these private credit portfolios; hence we are flying blind to some extent.”

Jamie Dimon specifically called out steep discounts to book value at which many BDCs trade, prompting Marc Lipschultz to retort that Dimon should “look for trouble in his own house.” According to market data, Blue Owl shares tumbled 27% this year with BDC portfolios languishing.

Funding Pressure

According to Finian O’Shea of Wells Fargo, softness in BDC debt issuance “could be explained by a slower equity growth outlook for the asset class” rather than credit issues. However, elevated spreads ultimately raise funding costs for managers and make it harder to underwrite attractive deals.

8. Moody’s Provides Counterargument

Marc Pinto, Moody’s head of global private credit, told CNBC that “one cockroach does not a trend make” despite concerns over loose lending standards. According to Pinto’s CNBC Squawk Box interview, “when we dig deeper here and look to see if there’s a turn in the credit cycle, which is effectively what the market seems to be focusing on, we can find no evidence.”

Default rates on high-yield debt remain below 5% and are expected to drift below 3% in 2026, according to Pinto’s assessment. By comparison, during the 2008 financial crisis, defaults reached low double digits.

According to Pinto, who attended a conference with approximately 2,000 bankers, the word he keeps hearing is “resilience” with GDP growth performing better than expected six months ago. The US economy has proven stronger than anticipated despite persistent labor market and tariff concerns.

Market Perspective

According to Glenn Schorr of Evercore covering JPMorgan and alternative firms, a few bankruptcies don’t equal an impending crisis and some may have “misread” Dimon’s comments. However, he noted that if defaults rise 1-2%, perspectives will differ on whether that’s “a big deal” or “defaults have doubled.”

Deals of Note

• 777 Partners - $500M fraud charges filed against co-founder Josh Wander

• Zions Bancorp - $50M loss on two commercial loans disclosed

• Western Alliance - Fraud lawsuit over Cantor Group credit line revealed

• BDC Bond Spreads - Concessions doubled from 3-5 bps to 12 bps+ since January

• Insurance Holdings - $530B in private placements, $218B with private letter ratings

Forward Outlook

• Bank-private credit tensions escalate into open warfare after years of détente

• Regional bank losses validate Lipschultz’s counterargument about bank vulnerabilities

• Academic criticism questions fundamental performance and valuation claims

• IMF scrutiny intensifies as managing director publicly expresses sleepless nights

• BDC market stress accelerates with spreads widening and stocks declining

• Insurance complexity risks mount as S&P warns about disclosure gaps

• Fraud prosecutions expose due diligence failures across industry

Final Takeaway

Dimon threw the first punch with his cockroach comment and Lipschultz landed a solid counterpunch by pointing out Tricolor and First Brands were bank-led deals. Then regional banks proved Lipschultz’s point: Zions $50M loss, Western Alliance fraud lawsuit, Jefferies $715M First Brands exposure. The problems aren’t just in private credit, they’re everywhere.

But the academic study calling returns “illusory” with 30% residual value in 2015 vintages strikes at private credit’s core value proposition. When the IMF managing director admits the sector “keeps me awake at night” and warns about “very significant shift of financing” to less-regulated lenders, regulatory momentum becomes inevitable.

777 Partners’ $500M fraud charges aren’t isolated incidents. They validate concerns about due diligence when lenders accept representations without verification. S&P’s warning that insurers hold $218B in privately-rated credit chasing 10 extra bps demonstrates how opacity infected institutional portfolios.

BDC spreads exploding from 3-5 bps to 12+ bps since January reflects violent market repricing. Blue Owl’s 27% stock decline indicates investors are differentiating aggressively despite Lipschultz’s defiant rhetoric. When your own stock price contradicts your narrative, the market is calling your bluff.

Moody’s Pinto arguing defaults stay below 5% with no cycle turn provides the counterargument. But his caveat that “that could always change” acknowledges the uncertainty everyone feels. The coordinated assault from the IMF, academics, prosecutors, S&P, and regional banks creates narrative problems even if credit holds.

The Dimon-Lipschultz war exposed the fragile détente between banks and private credit. Both sides have cockroaches. Both sides have losses. The difference is banks operate under regulatory scrutiny while private credit hides behind mark-to-model accounting. That advantage won’t last when the IMF chief can’t sleep and academics are publishing “mark-to-myth” studies.

Private credit built its $1.7 trillion franchise on superior risk-adjusted returns without mark-to-market volatility. When that story faces coordinated attack from multiple credible sources, defensive rhetoric from billionaire managers won’t suffice. The industry needs transparency it’s been avoiding or regulatory oversight it’s been evading. Neither option is appealing.