NEW YORK – J.P. Morgan Securities Inc., which has been shifting its business from commercial to investment banking, in January launched the first in a series of private equity funds.
Tentatively named J.P. Morgan Latin American Capital Partners, the vehicle has a $1 billion target and will receive a significant infusion from the firm, said Monty Cerf, managing director at J.P. Morgan. A majority of the capital, however, will come from new institutional investors. Tim Purcell, a managing director, will oversee day-to-day operations of the fund; Alfred Irigoin is the other senior member of the fund.
“We are really stepping up external capitalization to support investing,” Mr. Cerf said. The fund will take in capital from friends and family, but the firm hopes to expand its investor universe by targeting a global network of new institutional investors, including public and corporate pension funds, endowments, banks and insurance companies.
“Offering access to these [private equity] funds will enable us to solidify relationships around the world,” Mr. Cerf said.
The new Latin American fund will make primarily non-controlling investments in basic business sectors such as telecommunications, manufacturing and banking – industries that have been largely untapped by local or foreign private equity investors. The region has a rich supply of private investment opportunities in public entities as a result of companies going public early and then being stranded on local exchanges. Political volatility also will weigh heavily on the deal evaluation process.
While certainly not the first private equity fund to target Latin America – The Exxel Group, WestSphere Capital Associates, Hicks, Muse, Tate & Furst and Newbridge Latin America, among others, launched such funds last year – J.P. Morgan believes it will be well served by the global presence of its commercial banking operations.
“We are not like some firms, sticking a flag in the ground and saying we have an operation,”Mr. Cerf said. “We have been doing business in these countries for years.”
The firm intends to launch a second vehicle in the second quarter, focused solely on the global telecommunications market. The still-unnamed fund will have a target in the range of $500 million to $1 billion and will be managed by John Watkins and Mr. Cerf. Other staff working on the fund include Paul Thunissen in New York and Matt Niehaus and Michael Robinson in San Francisco. Until the vehicle is launched, Mr. Cerf said the telecom group will have access to the firm’s capital to make investments and will seek to hire an international investment professional.
Backing Teams, Not Ideas
The fund managers will pursue investments in media, telecommunications and technology, as it relates to telecom, Mr. Cerf said. Investments will shy away from early-stage venture-capital in new ideas in favor of larger-ticket deals where the fund will assemble a management team with sufficient capital to execute a growth strategy in an established field.
“We plan to avoid business-model risk in favor of application risk,” Mr. Cerf said.
J.P. Morgan has been a principal investor since 1982 and to date claims a 40% internal rate of return. This track record was one of two factors in the decision to launch the family of funds, Mr. Cerf said. The second factor was the potential for the firm to realize higher returns on its own private equity commitments by leveraging them with additional outside capital.
This latest effort is further evidence of J.P. Morgan’s expansion into investment banking and private equity, a move that has included the hiring of AT&T Investment Management Co.’s seven-member private equity group in the fall of 1997 (VCJ, December 1997, page 5).
“This is absolutely a continuation of Morgan’s move beyond commercial banking and into principal investing,” Mr. Cerf said.
Morgan’s private equity placement group, which Mr. Cerf headed previously, will assist in placing the funds. John Littlefield will assume Mr. Cerf’s role with the placement group.