JPMorgan Chase & Co. (JPM) is set to divest its private equity arm, One Equity Partners (‘OEP’). This divestiture will aid One Equity Partners raise its own investment funds. Following the completion of the sale, the private equity unit will become an independent firm.
JPMorgan took this decision following One Equity Partners’ first-quarter 2013 reported loss of $182 million, compared with a profit of $134 million reported in the year-ago quarter. This marked One Equity Partners’ fourth quarterly loss over the last eight quarters.
Additionally, the private equity unit has been bogged down by inconsistent returns and uncertainty regarding its role in the bank. Moreover, the divesture reflects JPMorgan’s efforts to concentrate more on its core businesses of consumer and investment banking and asset management.
Of late, the private equity business has become less lucrative for banks due to the awaited regulations that are apprehended to restrict proprietary trading and investment activities of the banks. As per the Volcker Rule (a provision of the 2010 Dodd-Frank law), a company is prohibited from investing more than 3% of the private equity funds raised or 3% of the lender’s Tier 1 capital. This provision is expected to adversely affect the future of the bank-owned private-equity units, making them less attractive.
Though the Volcker Rule is yet to be implemented, it would not be applicable to One Equity Partners as it is funded wholly by JPMorgan. Therefore, the private equity unit of JPMorgan will continue to be regulated by merchant banking laws.
One Equity Partners, founded in 2001, has been a part of JPMorgan’s private equity investment entity, though it is not a core unit. Additionally, its investment ranges from $50 million–$500 million per transaction. One Equity Partners’ investment business is concentrated mainly in North America, Europe, Asia and South America. Its total investments equals to about $4.5 billion.
However, during the transition period, JPMorgan’s private equity unit will continue to make direct equity investments for the company. Moreover, the private equity arm of JPMorgan will continue to manage the existing group of portfolio companies.
Further, One Equity Partners will raise its subsequent investment funds from external sources instead of raising it from JPMorgan. This will be akin to independent private equity firms that pool funds from various investors.
Over the past few years, several banks have been spinning off their private equity operations to abide by the requirements of the Volcker Rule. Recently, Credit Suisse Group AG (CS) agreed to sell its private equity business to The Blackstone Group L.P. (BX). The deal is expected to be closed at the end of the third quarter of 2013.
In 2011, Bank of America Corporation (BAC) announced the divesture of BAML Capital Partners, clearly reflecting the anticipated impact of the Volcker Rule.
JPMorgan currently carries a Zacks Rank #2 (Buy).
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