JP Morgan spins out private equity

JP Morgan Partners (JPMP) became the latest captive private equity firm to exceed its parent’s appetite for the asset class earlier this week.

JPMP will become independent of JP Morgan Chase when it completes the investment of its current US$6.5bn fund. The unit will retain portfolio management responsibility for the global fund and heritage JPMP investments.

“We are committed to completing the investment of our global fund and honouring commitments to LPs,” said Jeffrey Walker, managing partner at JPMP. “We are also inspired by the notion of further growing our franchise.”

The global fund has about US$2.5bn left to invest, which is likely to take until the end of next year. Once that is done, an independent successor fund will be raised, which is targeted at about US$4bn. JP Morgan Chase is committed to invest 24.9%, or up to US$1bn, in the new fund. The bank will not commit above that level as that would make it an active LP and give it fiduciary commitments.

JP Morgan is reluctant to increase its exposure to the potentially volatile private equity asset class. It had a 15% tangible equity exposure in 2002, but has since reduced that to 10% and does not intend to go above that level again.

At the same time, JPMP had been doing larger deals that brought it into conflict with other sponsors, which are important clients of the investment banking business.

JPMP and DLJ Merchant Banking outbid Blackstone, KKR and TPG, for example, when they paid £1.62bn for Warner Chilcott in December. A recent survey suggests that banks earned US$9bn in fee income from private equity firms last year. KKR, the most lucrative relationship, shelled out US$495m in fees on its own. Blackstone spent US$419m.

Other banks have already moved to protect relationships. Deutsche Bank spun out MidOcean Partners and Morgan Stanley did the same with MetalMark Capital. CSFB aims to do the same with DLJ Merchant Banking, leaving Goldman Sachs among the few remaining captives.

Walker will continue to run JPMP after the spin out. It will assume a name that is unaffiliated with its former parent. JPMP, which has about US$13bn in capital under management, has an eight to 10-strong senior management team across six global offices. A spokeswoman for JP Morgan said these key staff members would follow Walker into the spin out.

JP Morgan Partners operates from European offices in London and Munich, specialising in middle-market buyouts across Western Europe with enterprise values between €150m and €750m.

JPMP’s venture capital team will spin out into a separate firm. One Equity Partners, the heritage Bank One private equity arm, will remain as the sole private equity vehicle for JP Morgan Chase.