The explosion of private credit has been met with a whole host of concerns, but among the louder ones more recently is that the industry has not experienced a downturn at scale. And therefore, what does that mean for borrowers when there's some kind of crisis?

When asked about the migration of assets to the non-bank sector during JPMorgan's Investor Day earlier this week, Chairman and CEO Jamie Dimon said, "we'll compete. We're going to be fine." But he added that the "question they should be asking is, what does it mean for the United States of America?" 

"A lot of those folks who took private-credit loans will be stranded when [obscenity] hits the fan," Dimon said. "Banks tend to work with the borrower and the middle-market loan in the crisis…in the mark-to-market world of private credit, they have to, as a fiduciary, book it at par." 

In other words, he said, "private credit hasn't dealt with high interest rates, hasn't dealt with the recession, and it hasn't dealt with high spreads."

We don't know how those workouts will…work. 

The next day, the CEO of one of the largest private-credit firms defended the industry and how it will act in times of stress. When asked on CNBC about Dimon's recent comments, Ares Management CEO Michael Arougheti responded: "False." 

"We've been investing in the private markets for 30 years; A loan is a loan whether it's held on a bank balance sheet or held in a private-credit fund," Arougheti said. "[Ares has] invested $150 billion into the private-credit market since we founded the firm, and we had a loss rate of one basis point. So everything that we've seen over the last 30 years would indicate that the risk people are trying to argue exists in our market just isn't true." 

Ares' Executive Chairman Tony Ressler, sitting next to Arougheti in the CNBC interview, said the growth in private credit will "actually reduce systemic risk." 

"These assets are going onto the balance sheets of companies that are not highly levered and that do not finance themselves with short-term liabilities or customer deposits," Ressler said. 

Private credit default rates

In January, the Federal Reserve looked at default rates in private credit and how they compare with loans made by traditional banks (leveraged loans and high-yield bonds). Citing KBRA DLD data, the Fed showed, "despite seniority in debt structure, private-credit loans have relatively low recovery rate upon default (or equivalently, exhibit high loss given default) compared to syndicated loans or HY bonds."

We obtained updated figures on Thursday from KBRA DLD, which showed more of a mixed picture when it comes to implied recoveries. The average post-default value of a direct loan was about 53.1 percent, below that of syndicated loans, which were 57.5 percent but higher than high-yield bonds, which were 46.3 percent

The Fed attributes some of that gap to private credit exposure being more tilted to sectors with lower collateralizable or tangible assets, like software, financial services or healthcare services. 

But the quicker private credit grows, the more interconnected it becomes with the traditional banking space. JPMorgan executives at Investor Day said the firm is the largest financier of private-credit portfolios, and it already has dedicated capital on the balance sheet that it uses in a direct-loan format for corporate borrowers. The firm is also developing a co-lending program to boost the amount of capital it can deploy in this space. 

So if the eventual downturn does manifest in the economy, it's likely that you-know-what will hit the fan for everyone. Some borrowers will feel the hit more than others.