The group will put $8 billion of its own cash into the new fund. It is believed to be the largest single contribution ever made to a single such fund by one entity. The remaining funds would be coming from outside institutional investors, such as pension funds and insurance companies.
Private-equity funds have become more popular over the last five years or so since they invest in leveraged buyouts, start-up companies and other kinds of private deals. However, the shakeout in Internet stocks may have dampened demand.
Acknowledging this tough new environment, JP Morgan is reportedly planning a large marketing effort, including an up-front 8% “priority return” which would kick in before the bank partners get to see any return.
Other incentives include the bank’s impressive annualized returns of about 40% from previous private equity funds, as well as its plan to invest more that $2 billion of its own money in any new deals.
A change in regulatory capital requirements is also giving the new fund a push to get started. The Federal Reserve already is proposing tougher capital standards for banks investing in venture capital.
Reaction to the new fund was lukewarm, however, due to the market conditions, potential conflicts of interest between the fund and its parent bank, and whether there are enough attractive targets out there to warrant the investment.
An analysis of the banks private fund portfolio also showed that buy-outs that used to produce returns of 31% have declined and now produce substantially less. Venture capital deals were more lucrative, but those opportunities may be evaporating, according to some consultants.