(PrivateEquityCentral.net) New York-based JP Morgan Chase has slashed $1.4bn from its commitment to captive private equity arm JP Morgan Partners’ record breaking JP Morgan Partners Global 2001 fund.
The Global fund closed last year on $8bn, making it the largest single fund ever raised in private equity history, eclipsing the previous record holder, New York-based The Blackstone Group’s Blackstone Capital Partners IV, which closed on $6.45bn in July 2002.
The Global fund is still the record holder, barely, despite its reduction of 18 per cent to $6.5bn.
The Global fund has been trending ever downward in size almost since its inception. JP Morgan originally agreed it would invest three dollars for every dollar of third-party money that was invested each year over the fund’s projected five-year lifespan. The fund’s original target back in the heady days of late 2000 was a gargantuan $13bn.
But the investment climate soured during the recession of 2001. The target for third-party commitments was revised downward to $3bn from $5bn after limited partners only coughed up $1bn six months after the launch of fundraising. JP Morgan was ultimately able to raise only $1.7bn from third parties, barely more than half of the revised total. At the same time, the firm revised its internal commitment to $6.2bn from the originally proposed $8bn. JP Morgan will now contribute less than $5bn.
JP Morgan first began discussing a reduction in its commitment to the fund with third-party investors in March or April, just four months after fundraising ended.
The global fund’s limited partners include the Canadian Pension Plan Investment Board, the California Public Employees’ Retirement System (CalPERS), Caisse de dépôt et placement du Québec, the State of Michigan Retirement Fund, and the New York State Common Retirement Fund.
“We had 100 per cent support from all our LPs, and full support from our advisory committee as well,” a source close to JP Morgan said. “We said this was more consistent with our investment base and with the market opportunity that’s out there now.”
JP Morgan also got approval to extend the fund’s target investment period by a year, to five years from four.
JP Morgan’s new investment quota will be approximately $1.2bn per year. “It allows us to make more prudent and higher IRR investments if we’re not feeling pressure to invest,” the source said. In addition, “There’s always the potential to upsize the fund if we want. If the market picks up in the next year and there’s a tremendous amount of opportunity there, there’s no reason the partners couldn’t go back to the bank and ask them to re-evaluate.”
The source said the bank’s reduction is entirely separate from the decision to reduce exposure to the private equity asset class announced in an internal memo last December by JP Morgan chief executive officer William Harrison.
Harrison told employees in the memo JP Morgan would cut its investments in external private equity funds to ten per cent of shareholders’ equity, from 20 per cent. “That pertains mostly to fund investments that were lumped under the JP Morgan fund umbrella, where we are experiencing write-downs,” the source said. “It does not at all indicate any reduction of commitment to the direct private equity investment portfolio, where we are recording positive returns. The bank stands behind that 100 per cent.”
Between its first close in November 2001 and the final close a year later the Global fund made 39 investments, including medical diagnostic imaging company MedQuest from Boston-based private equity firm TA Associates in a management buyout valued at $350m, and industrial-scaffolding company Brand Services from DLJ Merchant Banking for approximately $500m. Other investments include the Teksid Aluminum division of Italian car company Fiat; Chromalox; Axis Specialty; Berry Plastics; US Filter; Crosstown Traders; Klockner Pentaplast; Brake Bros; and Corgentech.