JP Morgan Fund Still Hasn’t Hit Mega Status

Question: When is holding a first close on your new fund not cause for celebration?

Answer: When you’re six months late and $175 million short.

Such is the predicament of JP Morgan Partners (JPMP), which has now been trying to raise its global mega-fund for over a year. The New York-based firm finally managed to hold an unannounced $825 million first close last month, but it had originally planned to have at least $1 billion by May. Moreover, an initial $13 billion total target ($5 billion from outside LPs and $8 billion from J.P. Morgan Chase & Co.) has now been scrapped in favor of an only slightly more manageable $9 billion target ($3 billion from outside LPs and $6 billion from J.P. Morgan Chase).

While JPMP plans to hold a final close on the revised target in approximately six months, there are some legitimate questions about where the remaining capital is going to come from. A number of leading pension funds, endowments and funds-of-funds have already declined to participate. Others, like the California Public Employees Retirement System (CalPERS) have let the fund prospectus gather dust since receiving it in Nov. 2000.

“Why would I have gotten involved with this thing?” asked one fund manager who has already rejected the JPMP fund. “If I wanted to get into something huge, I would have invested in the Warburg [Pincus] fund and probably gotten better returns.”

The issue of returns is especially sensitive over at JPMP, as it has been publicly flogged for regularly adding to the losses of its parent company. Unlike most private equity firms that try to shield certain financial information, even from their own LPs, JPMP receives extensive media and industry scrutiny every time J.P. Morgan Chase opens up its books.

Moreover, LPs have noticed that the math just doesn’t add up when it comes to the proposed investment pace of JP Morgan Partners Global 2001 Fund LP.

The fund is expected to invest its capital over a five-year period, which comes out to $1.8 billion annually if it hits its revised $9 billion target. The problem is that JPMP’s track record does not provide any evidence that the firm can maintain such an active disbursement rate for more than one year.

Not only has JPMP not managed to disburse even $1 billion so far this year, it still has significant reserves of dry powder unrelated to the global mega-fund. For example, JPMP is sitting on approximately $700 million of untapped capital in a Latin America-targeted investment vehicle.

A source within JPMP claims that its fund-raising troubles are mostly a result of poor economic conditions, even going so far as to cite the Sept. 11 attacks. In reality, however, the market was still humming along when JPMP launched its latest effort.

Crosspoint Venture Partners, for example, managed to secure $1 billion worth of commitments within a week last November, while Austin Ventures took just three months to raise a $1.5 billion fund. While neither of those vehicles is nearly as large as the one JPMP is pitching, they were both bigger than what JPMP has thus far been able to secure.

And, the subsequent economic downturn has cast a long shadow over both JPMP’s prospects and the types of deals a mega-fund can pursue.

“With all this money chasing large deals, who do you then sell these companies to if you can’t take them public?” asked one pension fund manager who rejected JPMP’s proposal based on worries that the fund could not deliver on its promised returns. “Where do they go? Who’s going to buy them? The buyout funds won’t do it. Corporations don’t want to integrate them. We’re seeing lots of companies languish in these private equity portfolios.”

David Mullane, who runs the internal fund-raising efforts for JPMP, declined to be interviewed for this story.

Dan Primack can be contacted at: Daniel.Primack@tfn.com

Carolina Braunschweig can be contacted at Carolina.Braunschweig@tfn.com

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