BERKELEY HEIGHTS, N.J. - AT&T's in-house money manager is handing J.P. Morgan some $3.8 billion in private equity assets from AT&T's and Lucent Technologies' pension funds.
As part of the deal, the seven-person private equity staff at AT&T Investment Management Corp. will become employees of J.P. Morgan Investment Management Inc., New York.
For the cost of salaries and bonuses - offset by fee income from the AT&T Co. and Lucent Technologies Inc. funds - J.P. Morgan Investment has boldly entered private equity investment management with an experienced and highly regarded team and one of the most broadly diversified private equity portfolios.
Reporting to work across the Hudson River as new J.P. Morgan employees will be Larry Unrein, Ted Beir, Brendan Cameron, Laureen Costa, Jarrod Fong, Eliot Powell and Sandy Zablocki. Mr. Unrein, who led the team and was vice president of private equity, also will head the group at J.P. Morgan, said Dennis Kass, managing director and head of institutional business at J.P. Morgan Investment Management.
The members of the ATTIMCO private equity team have an average of eight years with the group, said a spokeswoman.
"This . . . represents a new capability for us," said Mr. Kass. "This was something we've had under consideration for quite a while.
"It didn't escape our notice that private equity has become a structural allocation of large pension funds," he said. "This pretty well completes our global product line, and that is precisely why we are so enthusiastic about it."
J.P. Morgan is expected to assume responsibility for the private equity portfolio Nov. 1.
Keeping staff together
Robert Angelica, president of ATTIMCO, said raids on pension fund private equity professionals by the partnerships, and the desire by ATTIMCO senior professionals to keep the private equity team intact, led to the decision.
"The reality is it is difficult even for a private pension fund to compete" with the partnerships, said Mr. Angelica. "If you look into the experiences of other large private pension funds, almost without exception, they have had difficulty retaining people in the private equity area.
"Our people are very good - the best in the business - which is why we fashioned this arrangement," he said. "They were increasingly being presented with attractive employment proposals.
"The offers they were receiving were very attractive," said Mr. Angelica. "Up until now, they found this (working with ATTIMCO) more attractive.
"But the gap has been widening."
During the past year, many pension funds - including the state employee retirement systems for Michigan, New York, Florida and Pennsylvania; the California State Teachers' fund; and the pension fund for General Motors Corp. - have been raided of their private equity talent.
Private equity investment programs often are suspended when defections of key professionals occur. Because of the sector's popularity, a delay in overseeing and evaluating new partnership opportunities can lead to an investor's exclusion from a choice partnership.
Management, staff decision
ATTIMCO senior management proposed the deal, Mr. Kass said.
The decision was made jointly by the ATTIMCO senior management and the private equity staff, said Mr. Angelica.
"It grew out of several months of discussions and we hit upon this idea," said Mr. Angelica. "This wasn't presented in any form of an ultimatum."
J.P. Morgan was the only firm with which ATTIMCO held discussions.
The decision to approach J.P. Morgan was due in part to the firm not having a private equity unit, said Mr. Angelica.
"Our intent was in preserving the team, the investment process and the network of contacts we have in the private equity industry," said Mr. Angelica. "If it were merged into a pre-existing group, those things would get diluted in some ways."
Becoming J.P. Morgan employees was amenable to the private equity team because of the firm's breadth in the global markets and the support they could bring to the team's efforts to grow the business, he said.
Focusing on AT&T assets
"The immediate plan is to focus primarily on the management of the assets that AT&T is awarding us to manage," said Mr. Kass. "AT&T certainly does have interest in continuing a private equity investment program, and it is certainly our intent to offer private equity investment vehicles to our clients.
"We intend to offer to clients a buy-out fund of funds and a venture capital fund of funds in which we expect AT&T to be a lead investor," said Mr. Kass.
Mr. Angelica declined to discuss in detail the private equity team's performance, but described it as strong.
"I can say our objective is to earn at least 500 basis points above public equities, and we have exceeded that objective almost over any time period you want to look at," he said.
Representatives from both parties declined to discuss the amount of fees J.P. Morgan will earn from managing the portfolio.
"The fee was negotiated on an arms-length basis based on AT&T's investigation of the market for investment services of thus type for a portfolio of this size," said Mr. Kass.
"Suffice it to say," said Mr. Angelica, "we have an attractive fee arrangement here."