J.P. Morgan Looks To Cut PE Arm –

Amid rumors of a 20% reduction in forces, an internal memo from the desk of J.P. Morgan Chase & Co. CEO Bill Harrison has made its way to the public domain. The memo states the amount of private equity commitments as part of common equity will be reduced from 20% to 10 percent.

“This will not affect the private equity arm’s direct portfolios or the new global fund,” said a source close to the firm. “This reduction will involve only third-party funds and non-core assets.” The source added that non-core assets could include funds acquired through a merger.

JPMorgan recently closed the largest private equity fund to date, the nearly $8 billion J.P. Morgan Partners Global Investors LP. JP Morgan officials declined to comment whether the reduction mentioned in Harrison’s memo was related to the bank’s inability to raise the funds congruent with its initial target of $13 billion.

In the memo, Harrison stated, “Private equity is a strategic and good business for this bank.” A source at another buyout firm speculated that Harrison’s statement was designed “to calm the troops.” Regardless of intention, the message is clear: In the next three to five years, JP Morgan will divest itself from 50% of its private equity ventures.

“This behavior is consistent with what we’re seeing from most commercial investment banks,” said a managing partner at an outside firm.

Other buyout pros are not so optimistic. “This is bad news for JPMorgan and bad news for the industry,” said a partner at an outside firm. “Sacrifices are being made, due to lower returns and diminished profits from LBOs. The industry got too big for itself when firms started promising 30% to 40% returns, and then were not able to maintain that rate.”

Regardless of how this affects JP Morgan, this could be a blessing in disguise for the burgeoning secondary market. An influx of supply would be welcome to the ever-increasing demand of this growing faction of the buyout world.