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JPMorgan Launching Private Equity Fund

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Well, not really:

JPMorgan Chase (NYSE: JPM) announced today that the partners of One Equity Partners (OEP), the firm’s private equity unit, will begin to raise their next fund from an external group of limited partners and become independent from JPMorgan Chase. One Equity Partners currently manages approximately $4.5 billion of investments for JPMorgan Chase in direct private equity transactions and has produced strong returns over the last twelve years.

OEP will continue to make direct investments for JPMorgan Chase for an interim period. OEP will still manage the existing group of portfolio companies for JPMorgan Chase to maximize value for the firm.

"Private equity unit," at a big bank, can mean different things; sometimes those units run private equity funds with outside money (Goldman PIA), while others are pure bank-funded merchant banking (Wells Fargo's Nor'west Equity Partners1). OEP is all JPMorgan shareholder money: "Our sole funding relationship with JPMorgan Chase & Co. enables us to be as patient as needed to achieve success." Was all shareholder money. Now it'll be outside money, and also outside, like, office space, though the timing on which happens first isn't clear.

The press release is a little weird, no? Heavy on the "thanks for your service" but light on the "good luck in your future endeavors": Jamie Dimon is quoted saying "I'm sure they'll be great," but no one from OEP is quoted saying, like, "we're looking forward to running a private equity fund and dealing with investors," or "hey, if you're reading this, consider investing in our fund"2 or whatever. This is a big day for them! They're launching private equity fund! Hittin' the road, shaking hands, raising money, telling stories. They should be pumped. But it seems like they'll miss life at JPMorgan a little?

So why leave? Not Volcker! Being all shareholder money made OEP capital-inefficient but Volcker-approved. So there's no particular regulatory need to get rid of it. Instead:

Instead ... the decision is a reflection of JPMorgan’s emphasis on its client businesses rather than making investments off the firm’s balance sheet. ... One of the bank’s reasons for de-emphasizing its private equity investments ... is that it didn’t want to be in businesses that directly competed with some of its prized private equity clients, like Blackstone Group and K.K.R. JPMorgan’s investment bank has a very lucrative business both advising and making loans to the world’s largest buyout firms.

A fun thing about banking is that almost everything you do can be characterized as a client business. Like, basically, you're in the business of taking deposits, making loans, trading and investing, and the people you're taking deposits from and making loans to and trading with and investing in (and investing for) are all "clients," or at least "customers" or "counterparties" or whatever you want to call them.3 This gives a special piquancy to a lot of banking conflicts of interest: when Goldman advised El Paso to sell itself to part-Goldman-owned Kinder Morgan, the conflict was not between two bits of Goldman but between two sets of Goldman clients. Goldman banking had obligations to El Paso, but Goldman PIA had obligations to its investors too.

While private equity funds are obviously "client businesses," even merchant banking businesses like One Equity Partners have a clienty element too: the portfolio companies to whom you're giving money are clients, of a sort anyway. I mean, it's kind of like banking, if you squint: you give companies money to build their businesses and hopefully they pay you back with a profit. Also now you're, like, their bank, and you can go do banky stuff for them, just like you would if you loaned them money and then used that to demand additional business. Wells Fargo knows this:

The lure of private equity to companies like Wells Fargo is not only profitable investment returns, but also new business for other parts of the bank. The funds work with small- and mid-sized companies that often also need loans, treasury management, and other financing and services, former CEO Kovacevich said.

JPMorgan, also a big cross-seller, presumably knows it too. But after certain cetacean unpleasantness you can understand why they might prefer to err on the side of keeping only the most clienty client businesses. JPMorgan's Corporate & Private Equity segment has been trouble recently, and a thorough cleaning seems to be in the cards: first it was rendered Whale-free and now, it seems, it'll be private-equity-free as well.

JPMorgan Chase Announces One Equity Partners to Raise Future Funds Independently [JPM]
JPMorgan’s Private Equity Unit to Become Independent [Reuters]
J.P. Morgan’s One Equity to Become Independent PE Firm [WSJ MoneyBeat]
JPMorgan to Spin Out its Private Equity Unit [DealBook]

1.There's not actually an apostrophe in Nor'west, it just looks better to me that way.

2.I know, I know, that one's illegal.

3.Pure prop investing in secondary-market securities - when there's no client whose money you're investing, no client in whom you're directly investing, and no client for whom you're making markets - is the exception, and it's an important one. (The London Whale for instance.) But you can fit a lot of prop-ish-looking-stuff into one of the other buckets.