Can Private Equity Firms Do What JP Morgan Does?

JP Morgan has a strong stomach for leveraged loans; does Blackstone?

JP Morgan just decided to hold on to $4.9 billion of leveraged loans by reclassifying them from “held for sale” to “held to maturity.” Mike Cavanagh, the chief financial officer of the firm, considers the loans — currently dirt-cheap — to be “good long-term investments,” wrote Oppenheimer & Co. analyst Meredith Whitney, who attended the firm’s investor day. JP Morgan will set aside $500 million in loan loss reserves for the loans. The firm still has $21.4 billion of funded and unfunded loans that are classified held-for-sale, which means the bank is still planning to syndicate them. JP Morgan would have to take an $800 million writedown if the loans were marked down this week, said co-head of investment banking Bill Winters.

It all highlights the very reason that private equity firms will have trouble bypassing the banks, as Blackstone Group’s Tony James and Terra Firma’s Guy Hands said this week their firms will do. There’s a long-held, and probably accurate, assumption that size matters in the lending business: banks have a wide, global network of debt buyers to which they can distribute the loans; and if they can’t, they can hold them. If Blackstone is planning to finance deals of any size, it would have to run the same risk of being in the “storage” business.

This is something Steve Black knows. Black, co-head of investment banking for JP Morgan, sniffed at the investor day: “If they think they can do that themselves without the banks then God bless them. I don’t think that will work very well, but let them try.”

So there.

Maybe James should have talked it over with Black when they had dinner together last week; the subject wasn’t touched on before their public statements, Black said. Either way, if the private equity firms do bypass the banks, both sides lose a little something. JP Morgan would lose the estimated $412 million that Freeman & Co. estimates the bank earned from arranging loans last year. Blackstone would lose the market knowledge, structuring expertise and distribution network that a big bank brings — not to mention the money it would cost to start a lending operation and get the licensing from regulators.

So can’t we all just get along?