The pension funds of General Electric Co. and IBM Corp. are among the investors in a J.P. Morgan & Co. limited partnership that ran into trouble with its first and only investment.
Although it's too early to tell, it's possible the entire investment could be lost.
The $1 billion Corsair fund pumped $162 million into Banco Espa?ol de Crdito, Madrid. The bank, Spain's fourth largest, was taken over by the Bank of Spain, which threw out the bank's board, including a J.P. Morgan vice chairman.
GE's pension trust owns 1.5% of Banesto, as the bank is known, through its Corsair investment. Janet Hengelbrok, director of marketing communications at the $27 billion General Electric pension trust, said: "We're not really prepared to make a comment about what our action is going to be. Right now the status (of our investment) is the same," she said, adding 1.5% is "a pretty small stake."
A spokesman for IBM declined to comment.
Richard Mahony, vice president at J.P. Morgan, denied some European press reports of rumors that Corsair was attempting to withdraw its investment in Banesto.
"At this stage, the investment remains in place. .|.|. Investors expect us to keep them informed. It's too early to say what the final outcome will be," he said.
He added "Corsair is continuing to look at other opportunities."
While limited partners generally have little recourse against a general partner on a specific deal, "the question is whether they have recourse over whether the fund continues," said Steven Galante, editor and publisher of The Private Equity Analyst, Wellesley, Mass. Such "rebellions" by limited partners are extremely rare.
"They'll wait until they get all the facts and details before they decide what to do," he said.
Corsair's mandate is to take 10% to 15% private equity stakes in capital-hungry banks in the United States and abroad. Banesto was its first and only investment to date. Corsair purchased about 8% of the Spanish bank last May.
Corsair was the first private equity limited partnership fund Morgan sponsored, although the bank has served as placement agent on several funds.
One manager steered clear of Corsair because it didn't believe private equity was the appropriate vehicle for banking industry investments.
"We looked at it fairly casually, and concluded it wasn't something we wanted to do. At the time, there wasn't a significant advantage to being a private rather than a public investor in these institutions," said Marc Tesler, managing director of Chancellor Capital Management, New York.
Chancellor oversees $1.5 billion in private equity, most of it discretionary.
"The investment business is one where there's no certainty. Obviously they made a bet, and the bet at this time doesn't look pretty. If it was one of 20 investments, it wouldn't be the big deal that it is," he said.
The Corsair fund, one of the few giant private equity funds that does not take controlling stakes, closed last January.
Corsair had a structure very favorable to limited partners, which enabled the first-time fund offering of J.P. Morgan to attract some corporate pension funds as well as wealthy individuals and European investors.
J.P. Morgan charged no up-front private placement fees and no annual management fees. The fund has a 2% investment fee only on assets that are invested.
The fund seeks returns in the 30% range, but must clear a hurdle rate of at least 20% before J.P. Morgan sees part of the profit. After that, the bank gets 20% of the fund's profits, with the limited partners dividing the remaining 80%
Meanwhile, J.P. Morgan's experience with Corsair doesn't seem to be hindering its fund-raising abilities in other areas.
Its Trident Fund L.P., which would invest in insurance companies, is close to hitting its $500 million target, and is expected to close this quarter, sources said.
The fund is being raised jointly with Marsh & McLennan Cos., with which J.P. Morgan has made several successful direct investments in insurance companies, particularly in off-shore reinsurers, and Mid Ocean Reinsurance Co. Ltd. in Bermuda.
In addition, the firm also is raising $500 million for a real estate limited partnership fund called Argo Partners, which will purchase whole portfolios as opposed to individual properties.
Argo, jointly sponsored with The O'Connor Group, New York, already has raised more than $400 million, sources said, and should close at the end of the month.