JP Morgan to spin off PE division

October 2014 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

JP Morgan Chase & Co is to spin off its private equity unit, One Equity Partners. The firm announced in August that the sale of the division will see part of its stake in One Equity sold to investment firms Lexington Partners LP and Carlyle Group LP’s AlpInvest Partners. The deal for One Equity has been valued at around $2bn, roughly half of the unit’s $4.5bn investments, and is expected to close before the end of 2014.

Under the terms of the deal, One Equity Partners will become an independent firm responsible for managing investments owned by Lexington and AlpInvest as well as approximately 30 investments retained by JP Morgan. The new firm will be known as OEP Capital Advisors LP. JP Morgan noted in a statement that the spinning off of One Equity will not have a material impact on its earnings.

Both Lexington and AlpInvest will be required to invest funds in the firm going forward. In a statement announcing the One Equity deal Richard Cashin, chairman and chief executive of One Equity Partners, said “We look forward to delivering great long term value to these two leading alternative investment management firms. We also thank JP Morgan Chase for their partnership and support of many years, enabling us to build the business we have today.”

The divestiture of the One Equity unit has been anticipated for some time. JP Morgan first announced its intention to spin out the division in June 2013, as part of an increased focus on its client businesses rather than making investments off the bank’s balance sheet. This move is not part of wider trend among banks. Indeed, under the Volcker Rule regulations that accompanied Dodd-Frank legislation in 2010, Wall Street firms are required to divest PE units, bolster capital held and reduce the levels of investments made with their own money. As a result of this increased regulatory pressure, JP Morgan has been spinning off units wherever possible. In July the bank agreed to sell about $1.3bn worth of loans and securities to Bain Capital LLC’s Sankaty Advisors LLC. The group also sold off its physical commodities business trading house in June 2014 to Mercuria for $3.5bn. JP Morgan also moved to shut down its transition management unit in May 2013 under regulatory pressure.

As a part of the process of scaling back its exposure in the PE industry, JP Morgan had originally intended to exit the One Equity unit entirely with its sale, as well as selling off a number of other investments in third party private equity funds. However, it is believed that the total sale of the One Equity division would have been too large in the current PE climate due to the firm’s considerable portfolio of investments.

Furthermore, JP Morgan’s decision to spin off One Equity, its final PE operation, was made as the firm was not considered a core unit. As a result, the division was placed on the market in November last year, but by early 2014 the sale of the business seemed to have stalled. One Equity has endured a difficult 2014 to date. During the second quarter of the year it generated revenue of $36m compared to $410m in the same period in 2013. Furthermore, One Equity posted profits of only $7m during the most recent reporting quarter, a significant fall from the $212m reported during the same period a year earlier.

One Equity, which was founded in 2001 by former Olympic rower Dick Cashin, was purchased by JP Morgan during its acquisition of Chicago-based Bank One in 2004. Typically the unit’s investments range from $50m to $250m per transaction.

Richard Summerfield