JP Morgan to divest JP Morgan Partners

Reversing a previous strategy, the financial institution will spin out its $13bn private equity arm led by Jeffrey Walker and keep its smaller merchant banking unit run by Jeffrey Cashin, One Equity Partners, in-house.

Global financial giant JP Morgan Chase has decided to spin out JP Morgan Partners, its large private equity arm with approximately $13 billion (€10 billion) of capital under management, into an independent unit once it has finished investing its current $6.5 billion (€5 billion) Global Fund.

The move, which reverses a previously reported strategy, marks a major change for JP Morgan Partners head Jeff Walker, a 21-year veteran of the firm who has withstood five acquisitions since he started at JP Morgan, known at the time as Chemical Bank.

In an interview last year with Private Equity International, a sister publication to PrivateEquityOnline, Walker noted that the vast network provided by JP Morgan Chase was a key catalyst for the success of the private equity unit.

“All of us are looking for these network advantages,” he said in the interview. “A network brings connections, contacts and knowledge. The network is what wins.”

Walker also expressed no interest in pursuing a spinout of his group. “We're part of the institution and today that's a huge advantage,” he said. “We'd be crazy to leave the institution.”

JP Morgan Chase will keep its smaller private equity unit, One Equity Partners, which manages approximately $2 billion in capital and was acquired as part of the pending merger between Bank One and JP Morgan Chase. One Equity, established in 2001 by former Citicorp Venture Capital president Richard Cashin, has reportedly been talking with outside investors as it looked to raise an independent private equity fund that would have included JP Morgan as a major investor.

JP Morgan Chase will maintain its interests in the Global Fund as well as legacy investments. The bank will also commit up to $1 billion in the next fund raised by JP Morgan Partners, which will reportedly be renamed.

The announcement by JP Morgan follows similar moves by other investment banks that are looking to avoid conflicts of interest between their private equity clients and their in-house merchant banking arms. Late last year, Credit Suisse First Boston announced that its principal investment operation, DLJ Merchant Banking Partners, will be spun off into an independent unit.

The rationale for these divestitures is clear:  investment banking fees. In 2004, private equity firms paid $9 billion in fees for M&A advice, debt financing, IPO work and recapitalizations, 17 percent of total investment banking revenue, according to Dealogic.

The move by CSFB came after a number of large private equity groups, having lost to DLJ in the auction for Warner Chilcott, reportedly told the investment bank that they did not appreciate being outbid by a CSFB private equity vehicle when they were paying the bank millions of dollars in fees.