JPMorgan Partners (JPMP) has set a new strategy to revive its troubled portfolio, but its parent company continues to distance itself from the problem child.
In a series of interviews with Venture Capital Journal, Mitchell Blutt, a JPMP executive partner, defended the firm’s performance and laid out a plan to return it to positive returns.
One of five business units within banking giant J.P. Morgan Chase, JPMP has been bleeding cash since the third quarter of 2000. In 2001 the group’s losses totaled $1.2 billion – at least $200 million more than it invested that same year. As a result, the bank’s bottom line has suffered. Had it excluded JPMP from its calculations, the bank would have reported earnings per share (EPS) of $2.23 in 2001. JPMP’s losses shaved 58 cents off J.P. Morgan Chase’s EPS.
In communications with analysts and shareholders the bank has blamed JPMP for its woes, along with the financial collapse of Argentina and the Enron Corp. In an email sent to employees regarding the bank’s 2001 performance, CEO Bill Harrison calls that JPMP’s performance one of “three negatives.” The email, obtained by VCJ, states: “In hindsight, we have had too much capital committed to [JPMP], and we have been reducing that by third-party fund-raising. Even with the writedowns, however, we have satisfactory returns on investment over a 17- or 18-year period.”
A spokesperson for JPMP declined to comment on the email.
The bank already has reduced the amount it has committed to JPMP’s planned $9 billion global private equity fund from $8 billion to $6.25 billion. And in the third quarter, it imposed a $60 million Nasdaq hedge to counter further losses in the group’s public equity portfolio. It was the bank’s decision, not a JPMP decision.
JPMP plans to close on its revised $8 billion target within six months, but in light of how slowly fund-raising has gone, even that sounds like wishful thinking.
Citing SEC concerns, the fund declined to comment on its fund-raising efforts.
When JPMP began marketing the fund in November 2000, it expected to have at least $1 billion of its original $13 billion target in its coffers by May 2001. As of December, it had raised $1.5 billion and lowered its target to $8 billion. But only two-thirds of the money comes from institutional investors. About one-third comes from high-net worth individuals who are clients of J.P. Morgan Chase’s private bank. A number of leading pension funds, endowments and fund-of-funds declined to participate. Others, like the Sacramento-based California Public Employees’ Retirement System, have let the prospectus gather dust.
“Why would I have gotten involved with this thing?” asks one fund manager who has already rejected JPMP’s proposal. “If I wanted to get into something huge, I would have invested in the Warburg [Pincus] fund and probably gotten better returns.”
Another fund manager who rejected JPMP’s proposal says he was worried the firm couldn’t deliver on promised returns. “Who do you sell these [JPMP portfolio] companies to if you can’t take them public?” he asks. “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.”
The Big Picture
Blutt contends that critics aren’t looking at JPMP’s long-term performance. “In any given quarter or the year we happen to report because [J.P. Morgan Chase] is our largest or most substantial shareholder,” and that shows short-term ups and downs, he says. “If you look at the performance over a five-year period, the returns are very attractive. [The bank] has its earnings objectives and responsibilities and they’re a little different than the way we manage the business.”
JPMP’s internal rate of return (IRR) reached 60 percent for the five-year period between 1996 and 2000, Blutt says. He declined to reveal the IRRs for 1999, 2000, and 2001 – the period when the firm’s technology and telecom investments took a big hit, and it realigned its portfolio.
“In 2000, we over-invested in tech and telecom – not by a dramatic amount, but by some amount that only history will tell,” Blutt says.
Technology and telecom companies still account for almost half the portfolio. As of the end of last year, 586 of the portfolio’s 1,122 companies were technology- or telecom-focused. They account for $2.7 billion of the portfolio’s $8.2 billion cost.
Technology and telecom also account for the lion’s share of the portfolio’s losses. JPMP’s $8 million investment in Internet infrastructure provider 724 Solutions Inc. is now valued at $2 million, and its $28 million investment in technology consultant Scient Inc. is now valued at $3 million. In the fourth quarter alone, JPMP’s public equity portfolio lost $137 million, while the value of its direct investment portfolio dropped $74 million.
Blutt says you need to put the losses in perspective. If you’re investing $1 billion to $2 billion a year, losing $74 million is “a comfortable loss,” he says. “Of course, I’d always prefer it to be better.”
JPMP is in fact moving away from technology and telecom deals. It has staffed up its industrial growth practice, health care infrastructure and life sciences groups.
Last year the firm sought new venture opportunities in the real estate, financial services and life sciences and health care infrastructure sectors. The firm led the third-largest venture-backed biopharmaceutical deal, with a $25 million investment in Eyetech Pharmaceutical Inc.’s $108.5 million Series C offering in August. It also invested in Myogen, a cardiovascular play, and launched two health care related IPOs.
Back to LBOs
Last year also marked a return to the leveraged buyouts business in the industrial sector, and to the financial services sector, especially the reinsurance business, where JPMP has invested in Access.
Still, JPMP is keeping a very close eye on its investments. Every six months, the portfolio is subject to a formal review, a process that involves every JPMP partner and all the deal teams. The effort is led by Faith Rosenfeld, head of the portfolio management group. It’s an internal process that examines each company in the group’s portfolio to assess strategy and direction, and examines the overall macroeconomic climate. The most recent was completed in October.
While reinventing its strategy, JPMP also has spent the past year cleaning up problem areas that have diverted energy from its core investment focus.
Nearly a year after the merger of J.P. Morgan and Chase Manhattan, the banks’ two private equity teams (JPMP and Chase Capital Partners) were finally integrated. By July, most of J.P. Morgan’s senior private equity team had been eliminated. Only Tim Purcell, head of the group’s Latin American activities, and Peter Reilly, director of its European real estate business, continue as partners. Although some J.P. Morgan principals and associates remain, the senior investment positions went to Chase Capital Partners. The group (JPMP) is overseen by Jeffrey Walker, formerly of CCP and now a member of J.P. Morgan Chase’s executive committee.
All told, 30 positions were eliminated from the private equity group following the merger. The JPMP investment team now totals 140 professionals worldwide.
In May 2001, JPMP closed Flatiron Partners, which was capitalized by CCP. As a result, managing partner Jerry Colonna and his team moved into the former home of Chase Capital Partners at 380 Madison Ave. While Colonna was invited to join JPMP in January of this year, Flatiron’s two other managing partners – Fred Wilson and Robert Greene – remain with Flatiron, which is tending to its portfolio but not making new investments.
The worst, Blutt says, is behind JPMP. It will spend the next six months both tending to its troubled portfolio and carving out new stakes in the health-care, industrial and financial-services sectors. But, its confidence remains shaky, still consumed by fund-raising. If these efforts falter and the losses continue, JPMorgan’s chief executive may find new reasons to distance the bank from the unruly stepchild that pulls stability away from its income statement.
Email Carolina Braunschweig at