NEW YORK - J.P. Morgan Chase & Co. is shopping around a new bond to help it shed private equity assets and raise cash, but pension fund executives who run money in-house aren't lining up to buy it.
Sources close to J.P. Morgan Partners, the bank's private equity unit, said the product is to be known as Porter Global Private Equity Ltd. as a way to securitize between $600 million and $800 million in venture capital and buyout positions, which it then can sell as bonds to gain liquidity. It is doing the deal with Partners Group, Zug, Switzerland, which issued $700 million of convertible bonds last year.
The bond is being shown both to private equity and fixed-income managers at a wide range of financial institutional businesses in the United States and abroad.
Because the bond is new, its structure is still being worked out, according to a source familiar with the deal. "There is some education involved as well as negotiation of terms (with potential buyers)," he said. And Morgan Partners isn't saying yet what the duration will be, because that's part of the negotiations, too.
Too expensive, duration too short
Pension investors say they'll stay away because fees are too high, the structure is too complex and the duration is too short. The return would be in the 20% to 25% range, depending on the performance of the private equity investments, sources said.
J.P. Morgan Partners manages $16 billion in private equity, said spokeswoman Nancy Israel.
Eric Green, director of the project at J.P. Morgan Partners, declined to be interviewed about the Porter bond, as did Mark DeVito, managing director for global debt at Merrill Lynch, New York, which has been hired as placement agent to sell the bond.
Candice Ronesi, spokeswoman for the $80 billion New York State Teachers' Retirement System, Albany, said system officials are aware of the Porter bond but wouldn't participate because NYSTRS requires a longer duration for its fixed-income investments than this bond would offer. NYSTRS manages more than $19 billion in fixed income internally.
Leighton Shantz, senior portfolio manager of asset-backed securities and mortgages at the $25 billion Tennessee Consolidated Retirement System, Nashville, said even though he hasn't seen the offering, he wouldn't be interested.
"It's not the domain we play in. We buy very vanilla, generic liquid instruments backed by such basic assets as autos and credit cards. I don't know the deal first-hand, but it sounds like it wouldn't be liquid enough for us, nor would it have a good secondary market. We look for something we can get out of easily," Mr. Shantz said.
As of March 31, Tennessee Consolidated managed $13.5 billion internally in fixed income.
`Creative' structure
But John Schumaker, senior managing director at New York Life Capital Partners, was more upbeat. "The structure is very creative, and a harbinger of things to come," Mr. Schumaker said. He expects his firm, a private equity investment subsidiary of New York Life Asset Management, will make a decision on whether to invest within the next few weeks.
"We could participate as an equity partner or debt partner or both," he said. "It's a structure we might use ourselves at some point. It's actually taking CBOs (collateralized bond obligations) to the next level, by putting existing assets in the structure and adding new assets."
"Because the principal is guaranteed, it allows people to participate in the upside, which is what makes it unique," Mr. Schumaker said. He also pointed out it could be of interest to public pension funds that are not permitted to invest in alternatives because of state regulations. "Since it's a bond whose principal is protected and rated, they would be able to participate," he said.
He expects the return on principal could average 15% to 20% a year, while the return on the smaller equity portion could be higher. "It's a great chance to invest with an institution like Chase, which has great experience with private equity, and has beaten all the indexes for the last 20 years," he said.
Immediate cash flow
The vehicle will be 40% funded with existing assets, which will give investors immediate cash flow, Mr. Schumaker said.
"If it were funded with all new assets, the returns would be too low - something like 10%, vs. a return of 18% or so for existing assets. The duration will be difficult to predict, but the most it will be is 12 years," he said. It's expected to be backed by as many as 100 private equity partnerships.
Brooks Zug, senior managing director at HarbourVest Partners LLC, Boston, a fund of funds that frequently invests in secondary partnerships, said his firm would be unlikely to participate in this kind of deal. "A securitized product will protect the downside, but then it doesn't offer the greatest upside. That concept can be a good alternative to investing in a bond, but it's not the right vehicle for achieving top private equity returns," he said.
Mr. Zug doesn't know which partnerships will be securitized in the Porter bond, but observed that the top investments aren't always included in secondaries. "When we buy secondaries, we look for top-quality assets. We don't need to pay the extra fees involved in securitization to protect against the downside."
