Jeff Walker recently sent a message to friends and colleagues on an important topic – music. Specifically, Walker wanted all to know his picks for the best albums of 2003.
Here are a few from his list: Grover Washington Jr., Prime Cuts. “Great jazz sax,” writes Walker. Dave Matthews, Some Devil. “Started in Charlottesville,” Virginia, Walker's favourite state. 3 Doors Down, Away From the Sun. “Rock,” he notes, for those not familiar with the band. Buddy Guy, Sweet Tea, a blues album. Evanescence, Fallen, which Walker identifies as “goth rock”.
Goth rock? Is this really the playlist of the 48-year-old head of one of the world's largest private equity firms?
Walker says his three teenage children get “frustrated” that their father often gets hip to a new band before they do.
In many regards, Walker seems one step ahead. His firm is the very model of institutionalised private equity in an industry that continues to cling to a boutique heritage. On the issues of disclosure, valuations, succession, operations, back office support and investor relations, JP Morgan Partners walks and talks like a fine-tuned corporation.
Much of this is due to the fact that the firm is, in fact, part of one of the world's largest financial conglomerates. But don't feel sorry for Jeff Walker – he loves running a captive firm. As the managing partner of JP Morgan Partners and vice chairman of JP Morgan Chase, Walker is a strange mix of entrepreneur and company man. He has thrived through uncertainty and bootstrapped himself to the top of a corporate ladder.
JP Morgan Partners' detractors are continually chagrined to find that the private equity firm, the largest captive investor, continues to receive major support from its parent, despite the fact that JP Morgan Chase suffered greatly amid declining private equity valuations during the post-bubble period.
After some cutbacks and “soul-searching,” as Walker puts it, JP Morgan Chase last year committed to providing Walker's group with approximately $1.1 billion (€879 million) annually for its direct investment program.
And what a program it is. Calling JP Morgan Partners “diversified” is an understatement. If you think Walker's musical tastes are eclectic, you should see JP Morgan Partners' portfolio. A Gulf Coast oil exploration company; a South Korean electric components maker; a pickle provider; an online florist; a UK plastics company…
The list goes on for another 700 companies based around the world in every sector and at every stage of development. JP Morgan Partners has a partner, Faith Rosenfeld, whose primary responsibility is to track the hundreds of portfolio companies and confer with the deal professionals about which ones need to be reviewed.
Overseeing these portfolio companies, and scouting for new deals, is JP Morgan Partners' team of 133 investment professionals in eight offices around the world.
But you won't see Walker getting stressed about all these investments and people. According to those who know him, Walker is unfailingly genial no matter what snafus come bubbling up from his firm's vast sea of activities. Says a former employee: “He is almost Zen-like in the way he approaches business.”
Walker is ethereally calm because, he says, his firm has a system that works. It has a network and a process that diminishes the chaos endemic to large organisations. Whenever a new type of problem surfaces that threatens to disrupt Walker's cool, he installs a process to deal with it. “I want to build a long-lived, sustainable business,” says Walker, sitting surrounded by deal tombstones in his office high above Sixth Avenue. “I want to build something that's creating value after I leave.”
JP Morgan Partners' Monday meeting is a good microcosm of the firm's broad network, the nurturing of which Walker has made his chief professional goal. He calls it the global integrated network. “We talk about GIN all the time here,” says a colleague.
I want to build something that's creating value after I leave
Every Friday, a thick package, containing deal memos and related information, is sent out to the 133 investment professionals for weekend reading. On Monday at 7:30 am, the powwow begins with a teleconference to the Hong Kong and Tokyo teams. At 8 o'clock, the firm's “group of 10” senior managers discuss issues related to the managing of the firm's operations – human resources, controls, strategy. At 9:30 is the largest meeting – centered on growth equity and buyout deals – during which all of the firm's New York professionals gather in a large room with video screens covering an entire wall to confer en masse with professionals in all eight offices. Following that, the various industry groups congregate for more specific meetings. Two o'clock is the venture meeting, when the San Francisco team connects with the mother ship.
Walker says the Monday meetings are designed to be “touchpoints where everybody knows they can connect, everybody knows they can have input into deals, and everybody knows what's going on in the firm and can add value.”
He says he likes the “random value-add” that firmwide networking can produce. “The hardest thing about building this firm has been getting the network to work,” Walker says. “You don't want to be developing silos, with people saying, ‘I'll do Asia, you do Europe.' You want a free flow of information between partners. When we're looking at an auto deal, you never know if there is one of our biotech guys on the West Coast that might know a member of the management team through his own personal network or who might have some information that could be relevant to the deal.”
The incentive to share and care is not limited to compulsory meetings. JP Morgan Partners' carried interest is paid out from a global pot. In other words, a team in one region or industry will be rewarded based on how the GIN as a whole has performed. “If I do it or you do it, I get the same carry,” says Walker. “So I'm motivated to make sure the best person does it. We're unique in that respect.” As a model of a well-run, global, diversified private equity firm, JP Morgan Partners shines. But there aren't very many other firms like it. Only The Carlyle Group, Warburg Pincus and to a lesser extent 3i have similar geographic and industry breadths. A larger question, then, is whether such a broad reach leads to good investing.
JP Morgan Partners and a few other global firms have shown that doing retail deals in Brazil while doing life sciences deals in Germany while doing auto deals in Detroit can be done. But
You don't want to be developing silos – you want a free flow of information between partners
should it be done? Is the best way to invest in, say, a network storage system in San Jose, really through a $6.5 billion pool of capital that just did a Singaporean yellow pages buyout?
Walker's answer is, absolutely. Again, he points to the serendipitous power of the globally integrated network. For example, the firm decided to participate in, and add value to, the 1999 buyout of South Korean auto parts company Mando Machinery by sending over a team that had worked on automotive deals in other parts of the world.
Opportunities for random value-add are also extended to JP Morgan Partners portfolio company managers. Larry Thomas, the president and CEO of Guitar Center, one of the firm's investment recipients, says he was impressed with Walker's program of bringing together CEOs under the JP Morgan Partners umbrella for networking events. Thomas says Guitar Center was able to create two new marketing drives as a result of these events. “Jeff really believes in the power of networking,” Thomas says.
Smaller boutiques, such as specialised venture firms, may have a competitive advantage in their specific niche, Walker admits, but adds: “You can't build that advantage beyond a small fund. So $300 million to $500 million is as good as you're going to get.”
Once a former private equity boutique approaches a middling size, Walker explains, it often removes itself from the niche in which it built its success, and then lacks the wherewithal to truly compete with the dominant, established firms – those, like JP Morgan Partners, with a system in place.
“I see the industry going to either side of a barbell,” Walker says. “Those that have a specific expertise and concentration will do well and get funded. And on the other end, those firms that are more global and integrated firms will have an advantage over the middle guys all the time.”
The firms on what Walker calls the ‘globally integrated’ side of the barbell “are attempting to become more professional, more integrated. They are going through succession questions and development questions, setting up business structures, as opposed to boutiques that are dominated by specific individuals and less reliant on a professional process.”
He draws a comparison with other industries once marked by an abundance of boutiques – management consulting, accounting, mutual funds. Those firms that emerged with strong business systems became dominant, while the medium-sized, weak-system firms either faded away or were swallowed up. “Guess what? We're not that different,” says Walker, referring to the private equity industry. “We're just at an earlier stage of life as an industry.”
The one-big-global-fund approach does not appeal to every investor. Walker notes that many funds of funds resisted the JP Morgan Partners Global Fund concept because the fund's diversity defeated their abilities to customise.
But some of the largest investors in the world appear to like JP Morgan Partners' broad mandate. Third-party investors that committed to the recent fund include The Canada Pension Plan, CalPERS, Caisse de Depot et Placement du Quebec, State of Michigan Retirement Fund and New York State Common Retirement Fund. Managers from many large pensions are trying to limit the number of relationships they have with private equity firms to cut back on administrative burdens. “The large LPs will all tell you they can't track more than 40 relationships with their limited staff,” Walker says.
Mark Weisdorf, who recently stepped down as head of private markets for the CPP Investment Board, the investing arm of Canada Pension Plan, has said publicly that large institutions are looking for firms, not funds. LPs want to be confident that their chosen general partners will survive through the next fundraising cycle.
JP Morgan Partners wants to be that firm. Investment partners like his “have less risk, because if one person leaves, nothing really changes,” says Walker.
Since its founding, JP Morgan Partners has been the site of enormous change, but with one constant: Jeff Walker has remained in charge.
In 1984, Walker was working for what was then called Chemical Bank, helping to set up investment banking units. Competing financial institutions like Morgan Stanley, First Chicago, Citicorp and Bankers Trust all had private equity divisions. “In those days, once you set up an investment bank, someone would say, ‘Well, what about this merchant bank thing,’” remembers Walker. He decided to propose the idea to his own employers.
In fact, various Chemical professionals had already proposed sundry forms of a merchant bank 12 times prior to Walker's pitch. Walker's iteration was to be organised like a partnership, with its professionals compensated like independent funds. The board and then-CEO Walter Shipley said yes to this version, committed $100 million, and called it Chemical Venture Partners. Walker was 28 years old, and had never done a private equity deal. Prior to joining Chemical, he had attended Harvard Business School and worked in the audit and consulting divisions of Arthur Young & Co. Then as now, Walker advanced his cause by building a better system. “I don't think they looked at me and said, ‘this is exactly the right person’. But I was the person who designed it and structured it and said that this was the time to do it and they supported me
Chemical Venture's debut deal was a $5 million investment in a Midwestern television station company called Backe Communications. The company was bought at eight times cash flow, merged with another property and, two years later, sold for 12 times cash flow. “Everybody looked at it and said, ‘These guys seem to know what they're doing. Let's give them some more capital,’” says Walker. Walker was made managing general partner three years after Chemical Venture's founding. The group would eventually change names, merge with numerous other private equity teams, and be given a lot more cash. In 1991, Chemical merged with Manufacturers Hanover, which had a private equity investment division of its own, MH Capital Partners. At the time, MH Capital was the larger of the two groups in terms of assets under management, with $900 million to Chemical Venture's $600 million, but the former group's capital was concentrated mostly in funds. Walker was named head of the combined entity.
In 1994, a development at Chase Manhattan would prove significant. The bank announced it would significantly increase its commitment to its private equity group, Chase Capital, agreeing to invest roughly $100 million that year through the group. The division, led by president Maria Willetts, had also been founded in 1984.
Two years later, Chemical and Chase merged in a $10 billion deal. Crucially, Chemical's vice chairman, William Harrison, was placed in charge of the combined entity's investment banking and capital markets divisions. Harrison, to this day a big advocate of the private equity direct investing model, and of Walker, put the Chemical Venture head in charge of the new Chase Capital Partners. Willetts resigned. In 1999, Chase Manhattan bought Hambrecht & Quist, a technology specialist that came with venture professionals and a slew of technology investments. The next year, Chase bought Beacon Group, a merger advisory firm that had a private equity arm. Both were folded into Walker's group. Before H&Q and Beacon could be fully digested, Chase and JP Morgan announced a $32 billion merger, creating a financial services giant to rival Citigroup and Bank of America. Like the MH Capital merger, JP Morgan's primary private equity business, JP Morgan Capital, was a fundmanagement division led by Lawrence Unrein. But the firm had recently launched a Latin American direct investment fund that nicely complemented Walker's Chase Capital operations. The two groups were combined. JP Morgan got the name, and Chase's Walker got the top post.
Now, Walker's ability to assimilate new private equity teams looks set to be put to the test again. JP Morgan's impending merger with Bank One includes the $3.5 billion One Equity Partners, led by Richard Cashin, a highly respected buyout specialist. That firm has 27 professionals in Detroit, Chicago, New York and Frankfurt.
In 2000, JP Morgan Partners was responsible for a full 25 percent of the parent organisation's earnings. But 2000 was also the start of a three-year period during which Walker and his private equity division would not be so popular.
As if the integration of what was beginning to look like a private equity pastiche wasn't enough, the formation of JP Morgan Partners coincided with the beginning of the market's long, painful disintegration.
As a division of a public institution, not only was JP Morgan Partners required to disclose its valuations, but to do so on a strict market-to-market basis. This meant showing big, unrealised returns during the stock market swoon, and huge write-downs and write-offs thereafter. While independent private equity funds held at cost and prayed for better days, JP Morgan Partners, and Walker, were getting castigated in the press, by shareholders and in the boardroom for wreaking JP Morgan Chase with more than $1 billion in losses.
According to people who worked with Walker at the time, his demeanor throughout this period was par for the course – he was serene. Quarter after quarter, the executives gathered at JP Morgan Chase's senior management meetings would demand that Walker explain what use private equity was to the parent company, whose share price was getting hammered. “Jeff never had the sky-is-falling attitude,” says a former colleague. “He would never get reactionary. He'd come out of those meetings completely calm, as if he didn't just get the shit kicked out of him.” Walker was clearly more confident about the longterm viability of private equity than many of the other JP Morgan executives. A person who attended a seniorlevel JP Morgan meeting during this time says that Walker walked into the room filled with anxious executives and said, “Now, the first thing I want everyone to do is breathe.”
With chairman and CEO William Harrison on his side, Walker managed to maintain JP Morgan Partners' position as a major player in the private equity market, albeit with cuts.
Walker admits that the past three years haven't always been pleasant. “It's not easy being part of a public company,” he says. “Because we were part of a public company, we had to recognise revenue in public positions and increase the value of those public positions. We were in stock positions that we couldn't get liquid on, and so we had to ride them back down again. Would I have rather just reported on a cash-on-cash basis? Yes. Living through that swing was difficult and stressful.”
In 2001, the parent company undertook a review of its private equity program (“and rightfully so,” Walker says), and concluded that its true strategic advantage – the core of its private equity business – was direct private equity investing through vehicles like the global fund.
By the middle of last year, Walker and the bank had settled on a $5 billion commitment. In addition, the firm has raised $1.5 billion from outside investors. Walker's group invests roughly $1.1 billion per year. This is down significantly from the heady days in 2000 when the firm was hoping for a $13 billion fund, but still enough capital to leave JP Morgan Partners in the big leagues. In the eyes of many observers, Walker has also masterfully maintained a healthy degree of independence within the parent company. “Very few people have been able to hold together a private equity shop within a large financial organisation,” notes Joncarlo Mark, a portfolio manager at CalPERS who knows Walker.
Walker comes from a business background – his father worked for General Electric and moved his family with each transfer. Walker was born in Tennessee, received his MBA at Harvard, but his heart resides in Virginia, where he attended college at the University of Virginia. He is the president of the board of trustees of the undergraduate business school, as well as vice-chair of a foundation supporting the Virginia home, presidential library and historic assets of Thomas Jefferson, a US president Walker greatly admires.
Walker divides his free time between his family (he is married with four children) and numerous non-profit organisations, including EMpower New York, the Morgan Library, the Lincoln Center Film Society and the JP Morgan Chase Foundation, of which he serves as chairman.
Around the office, Walker, a former bass player, is known to “go off on pop-rock buff conversations,” according to a source. He frequently attends live music events, an activity made all the easier by dint of his being a director of House of Blues.
Though he lives in a “gigantic house” in Darien, Connecticut, according to a source, Walker is not at all flashy. Charles R. Kaye, a co-president of Warburg Pincus and personal friend of Walker's, says: “You sort of expect someone in his role to be somewhat more of the staid, conservative type. But he's an interesting person and very down-to-earth. He's created an environment where people want to work with him and for him.”
Captive and happy
Walker's entrepreneurialism has been applied within a corporate structure, and he has treated each corporate challenge as an opportunity to refashion his firm. “The market has a lot of respect for Jeff Walker because he has been able to marshal the resources of a larger organisation to his benefit,” says a former colleague. “Running a private equity shop inside a corporation is riddled with lots of politics and stresses.”
The network is what wins
Many outside observers wonder why Walker doesn't attempt to flee his captive status, like so many other now-independent firms, and spin out from JP Morgan. Walker dismisses the idea. “We're part of the institution, and today that's a huge advantage. We'd be crazy to leave the institution,” he says.
Walker says that far from impeding his firm's effectiveness, JP Morgan Chase is a catalyst for success. This, he predicts, will allow JP Morgan Partners to outpace firms without the benefit of such a vast network. “We should produce outsized rates of return,” he predicts. “The only way you can do that is through connections and synergies. For this first fund, we're going to prove that we get outsized rates of return compared to the boutiques.”
“All of us are looking for these network advantages,” Walker adds, noting the many independent private equity firms that have forged alliances with larger financial organisations recently. “A network brings connections, contacts and knowledge. The network is what wins.”
JP Morgan Partners currently has $8 billion outstanding in total private equity investments. In 2001, the bank committed an additional $5 billion of its capital to the JP Morgan Partners Global Fund which raised an additional $1.5 billion of outside money. The combined total of $6.5 billion is being invested over six years.
The firm also has separate direct private equity investment vehicles which include a $1 billion Asian Opportunity Fund and a $700 million Latin American Fund. Total private equity capital under management is $16.2 billion.