According to the Wall Street Journal, banking giant JPMorgan is getting close to a deal to sell the majority of its Highbridge private equity division. The WSJ sources say the deal calls for the bank to relinquish control of the $22 billion private equity business that has quadrupled in size in less than a decade.
Apparently JPMorgan is close to finalizing a deal to sell most of Highbridge Capital Management private equity business to Highbridge CEO Scott Kapnick and other managers. The sources note that a major impetus for the deal was the team’s desire to move beyond the regulatory constraints of working at a large bank.
Details on JPMorgan sale of majority stake in Highbridge PE division
The Highbridge PE spin off calls for JPMorgan to keep a minority share of the private-equity arm and all of Highbridge’s $6 billion hedge fund business, according to the WSJ sources. The deal still requires regulatory approval, but is likely to close by year-end.
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The move by the largest U.S. bank to cut back on its asset management interests points to the ongoing transition in the regulatory and banking landscape since the financial crisis as megabanks shed their regulatorily overburdened units.
JPMorgan purchased a controlling stake in Highbridge in 2004, and gobbled up the whole firm in stages over the next few years.
The stealth Highbridge acquisition was one of the first by Wall Street banks trying to lock up their piece of the lucrative alternative investment pie. Most of these giant financial institutions are backing off from alternatives because of pressure from regulators to simplify operations or new limits on risky assets.
Analysts point out that a partial spin off of Highbridge would be the latest restructuring for JPM in recent years. Moreover, the major players on both sides who made the deal to land Highbridge back in 2004 are long gone—ex-JPMorgan executive Jes Staley, Highbridge co-founders Glenn Dubin and Henry Swieca and former Highbridge President Todd Builione.
The WSJ sources also highlight that upper management at Highbridge has for some time wanted to spin out the private-equity business so it could operate independently of a large bank. Over the last few months, JPMorgan CEO Jamie Dimon and asset management head Mary Callahan Erdoes finally came around to the belief the business would be able to expand faster and act more rapidly with full independence from JPMorgan.
On a May 21st 2014 conference call, one analyst called Highbridge the most successful purchase of a majority hedge fund ever. Specifically:
JPMorgan on the Asset Management side has been sort of, with respect to acquisitions, selective and not as prolific as some in the industry. But if you look at, say, the Highbridge acquisition, arguably the most successful majority purchase of a hedge fund transaction that ever was done.
How do you think about the sort of inorganic growth opportunities, be it to sort of add other pockets of call it manufacturing strength or otherwise, going forward?
Mary Erdoes – JPMorgan Chase & Co. – CEO, Asset Management
Yes, so, when you think about the Highbridge acquisition, also the Gavea acquisition that we did in Brazil, those were very unique and special cases where you have groups of people that want to have their firms live on beyond them, and you have groups of people that are very familiar with JPMorgan and have the same cultures and the values and all of that.
An acquisition of any kind only works if all those ingredients are in place. And otherwise, it’s a very delicate thing in the asset — I believe it’s very delicate in the investment management business in the acquisition game, because investment management firms are very high in culture being one of the most important things that makes them work, and autonomy being an equally important thing for a lot of these investors who want to do their thing the way they want to do their thing. They don’t want to be told what stocks and bonds they can or can’t buy and sell
In a February 2014 meeting with Mary Erdoes analysts from RBC noted:
Liquid alternatives have been mentioned more recently. JPM has had experience with liquid alternatives since 2005 with its former Highbridge subsidiary. Currently, fees for liquid alternatives are relatively high, but JPM expects them to eventually decline.