J.P. Morgan’s Venture Business Goes Solo –

JPMorgan Partners has given up trying to be all things to all people by splitting its venture capital and leveraged buyout teams into separate, independent firms. The move is part of the global private equity shop’s impending spinout from J.P. Morgan Chase.

The venture capital unit will be run out of either Menlo Park or Palo Alto, and is expected to start raising a fund of at least $400 million by early fall. (See JPMP Q&A, next page.)

The New York-based leveraged buyout group-which also plans to make some small growth equity investments-will likely hit up LPs for $4 billion in early 2006, and will manage a $1.2 billion-targeted Asia Opportunity Fund II that currently is being raised. Both efforts are expected to receive significant limited partner commitments from J.P. Morgan Chase, although the bank has said that it will not take more than a 24.9% ownership position in either fund.

JPMP currently is investing out of a $6.5 billion global fund that includes approximately $750 million for venture capital. The vehicle had been designed to be capped at $13 billion when fund-raising commenced in late 2000 (including $6.5 billion from the bank), but many prospective LPs expressed concern that JPMP was promising to do all sorts of deals (VC, LBO, etc.) in all types of industries (technology, life sciences, industrial, media, etc.) all over the world.

“The No. 1 reason why people didn’t invest in the fund was that it looked like it was trying to do too many things,” says Probitas Partners’ Dale Meyer, who used to serve as managing director and group head of J.P. Morgan Chase’s private fund group. “They were getting so much money from the bank that they probably didn’t feel like they needed to [narrow their focus].”

That narrowing will, however, happen with the spinout and subsequent split. Steven Murray, a JPMP partner on the LBO team, says that while neither the VC nor LBO firms will share common management, they will continue cooperating when it is of value to both sides. “We will have a portfolio with a significant number of companies that likely will be purchasing the enabling technologies-whether they be life sciences, technology or software-that our venture guys will likely be investing in. That’s kind of been the model for the last 20 years, but we just think that the specialization and the dedicated efforts and the compensation systems have drifted a bit too [far] apart. Therefore, having them independent-from a structural, managerial and economic perspective-is appropriate for both the general partners and limited partners.”

Murray is one of several senior partners who will help run the LBO firm, along with managing partner Jeffrey Walker, Christopher Behrens, Arnold Chavkin, Michael Hannon and Timothy Walsh. The VC practice will be overseen by Shahan Soghikian, Chris Albinson, Srinivas Akkaraju, Rodney Ferguson and Damion Wicker. (Wicker will relocate from New York to the West Coast.) The only JPMP partner not joining either group is Latin American specialist Tim Purcell, who is moving back to Chile.

Everybody’s Doing It

JPMP is just the latest in a long line of private equity group spinouts from parent banks, including MetalMark Capital from Morgan Stanley and MidOcean Partners from Deutsche Bank. There also was the proposed spinout of DLJ Merchant Banking from CSFB, although that deal now appears to have been scrapped due to compensation-related infighting.

Each of those moves-or proposed moves, in the case of CSFB-was largely prompted by perceived conflicts between I-banking clients and the private equity groups. Specifically, clients found themselves paying bank fees while bidding on certain deals, only to find themselves in competition with their bank’s private equity unit.

J.P. Morgan Chase was able to partially mitigate against that conflict by keeping JPMP outside of the investment bank, although certain clients did express concern over JPMP’s participation in the auction for UK-based drug company Warner Chilcott PLC. (It won the $3.1 billion deal, as part of a consortium that also included Bain Capital, DLJ Merchant Banking and Thomas H. Lee Partners.)

“The opportunity flow between the bank and JPMP has always come, more or less, on the basis of a banker/client relationship … a close relationship, but more arm’s length than at the other firms,” JPMP’s Murray explains.

Instead, the spinout is the culmination of discussions that began when J.P. Morgan Chase merged with Bank One last year. In fact, most talk centered around a spinout of the smaller One Equity Partners unit, to the extent that OEP managing partner Dick Cashin was already speaking with fund placement agents.

“The bottom line in the end is that the [bank] came to the conclusion that they like private equity, but that they wanted to fund it all themselves,” explains Jeffrey Walker. “This is a little different than what we have, because our last fund has both inside money and outside money 65% from the bank and 35% from outsiders. So we were given the choice as a group that we could either stay and be internally financed, or we could leave and continue to use outside money; but go for 75% instead of 35%, which is what we decided to do.”