Interview with Jeff Walker, Managing Partner of JP Morgan Partners

Jeff Walker of JP Morgan Partners was one of the keynote speakers at the annual HBS Venture Capital and Private Equity conference on February 1st, 2003. We had an opportunity to meet with Mr. Walker to get his impressions on the conference, discuss the state of the private equity industry today and talk about his memories of the time he spent at HBS as a student.

The Harbus: How are you enjoying the conference so far?
JW: I am having a great time. One of the conference coordinators suggested expanding the conference participants/audience to include HBS alums. I like that idea. The conference already has a great set of panelists (100 of them). It is as good as any conference out there. With the HBS name you have an opportunity to build something that could probably be a really nice cash flow generator for the club or the school. People want to come to something like this. However, don’t pick a four day vacation weekend to have it on next time.

The Harbus: Did you participate in one of these before?
JW: Yes, a couple of years ago.

The Harbus: As a keynote speaker?
‘JW: Yes. It was more of a boom time then, but we still talked about the same issues. Some of those issues are becoming more relevant today, such as the continuing professionalization and maturation of the private equity industry. The next generation of private equity professionals is ready to take leadership roles in the older funds. Some funds are managing that process well whereas others will lose good people. The venture industry is ahead of the buyout industry in moving control of the funds to the next generation. For example, Kleiner Perkins has made that switch as well as Warburg Pincus and some others. Maturing and professionalizing the industry does not only involve changing the professionals running the firms, but also the evolution of systems, processes, and brand behind each fund that make them sustainable and long-lasting. This proof of sustainability is a huge advantage in the market – the investors and the managers of companies will favor firms that focus on it. As you think about maturation of professional service industries in general, all of them followed a similar path – investment management firms, law firms, and consulting firms all evolved from entrepreneurial businesses to the more mature, brand oriented institutions that we have today. So why is our industry that different?

It’s not. It’s not an industry where one person can drive the business, like it used to be. In the future you will see two types of firms in the private equity industry, (1) a group of branded integrated firms and (2) specialists and boutiques that concentrate on one particular thing (e.g. early stage, on a particular 25-radius mile area, or a specific industry). The two types will work together leveraging their networks and focused area of expertise. This does say something important about the large number of middle sized firms that are not big enough to compete against the integrated firms and are not specialized enough to compete against the smaller, specialty firms. They will need to evolve or they will not last.

The Harbus: So you think we’re moving towards having a small number of superfunds, like yours, over the next 5-10 years while the medium size funds will disappear?
JW: That’s right. As I mentioned, you’ll still have boutique shops with a highly specialized knowledge, and I do think that the bifurcation of the industry will continue to happen. I really believe there are about 30 top funds in the buyout industry today that see most of the large and middle market leveraged buyout flow. They are on everybody’s list when they think about who to bring a deal. When a broker advises a company that is spinning off a division, the broker typically recommends who they should be showing it to. They’ll talk about the potential corporate buyers, but they will also talk about which financial sponsors to show it to. The brokers and managers of the selling company will determine which financial buyers to show the deal to based on the buyout firm’s portfolio and whether there are deals in it that are similar, the buyout firm’s industry knowledge, and whether the firm has the depth of professional resources to evaluate the deal. You want to be on that list of preferred buyers. This also applies to companies and opportunities that are developed outside of the auction process. The sellers and management teams are much more sophisticated these days. You want to maximize your flow of deals in the areas you specialize in so you can increase the likelihood of finding the best ones.

The Harbus: Are you seeing that limited partners beginning to pay more attention to the branded firms? And if so, how do you explain what reportedly recently happened to KKR when it attempted to sell a stake in its partnership to the Washington State Investment Board and got rejected?
JW: Washington and Oregon states are the biggest financial sources of funding for KKR. They love KKR, so don’t take their decisions as an indicator of anything. KKR went to them and asked for a very long-term, or “evergreen,” investment commitment maybe in exchange for a piece of its general partnership, that’s my guess. The states came back and said “no, it doesn’t fit our style, our structure, but we are still very committed to this category.” Now my guess is that when the market comes back and you start seeing some sales of companies and IPOs, that someone like KKR will go back to them and they might say “yes” to such a proposal because they will be more liquid and able to be flexible.

The Harbus: How are you seeing your relationship with LPs given that most of your capital comes from JP Morgan Chase?
JW: Our relationship with our outside limited partners is very good. Our Global Fund has been investing for a year and we have already invested $1.2 billion in a number of interesting properties. JPMorgan Chase (JPMC) brings us more than just capital. It brings a valued name in the marketplace, a network of deal flow, industry knowledge and access to financing capabilities of the top financier in the private equity industry.

However, our investment strategy and process is and always has been separate from the investment bank. Our investment decisions are made completely separate from the investment bank decision structure. As proof of that, I am a Vice Chairman of JPMC and report directly to the CEO. One other question some of our LPs have asked is whether JPMC is committed to private equity due to the losses that have occurred over the last couple of years. Just recently we and JPMC looked at the business and concluded, again, that the core, active, direct private equity (our Global Fund) was strategic and value added to them and that they were committed to it in the long run. We also concluded that there were certain non-core private equity portfolios (other than the Global Fund) that JPMC would not continue to fund. One of these portfolios is our indirect, fund portfolio. JPMC is currently a substantial investor in other private equity funds with $1.9 billion or so outstanding and another $2 billion committed. We will not be making any new investments in outside third party funds (buyout or venture). We also have a non-core direct investment portfolio that we inherited from the H&Q merger and we’ll probably sell that off over time. Bottom line, we are focusing on the same type of active, direct investing that we have always done well.

I have been in this business for nineteen years. I co-founded Chemical Venture Partners in 1984, we combined with Chase and changed our name to Chase Capital Partners, we bought H&Q, Beacon and Flemings and then we had the merger with JP Morgan after which we changed our name to JPMorgan Partners – each of those combinations brought their own private equity operations. No one has managed more acquisitions/mergers of private equity operations than I have, by far (laughter). But now it all feels like the old days, we have cleaned up the acquired portfolios and put non-core activities to the side and got back to focusing on what we do best, running a professionally managed, integrated, global, active, direct private equity business. Our integrated team feels good; it’s a culture that has evolved over a 19 year period.

It’s tough to build an integrated global business overnight, actually it is impossible. Building that culture where you’re exchanging knowledge with each other in a natural and frequent way on a global basis requires a unique model, and I think we have that.

The Harbus: On the subject of geography, over the last few years there’s been particularly more activity in Europe. How do you see that developing?
JW: We have a very strong group in Europe with offices in London, Munich and Milan. The private equity business in Europe is becoming mature and is clearly a permanent part of any large limited partner’s private equity portfolio. It is primarily a leveraged buyout market with a very small venture industry. Private equity funds in Europe have been concentrating resources in Germany with the belief that deal flow there would blossom. Well, that significant increase in German deals did not happen. Some funds are closing offices in Germany and others are downsizing their activities. There are and will continue to be good deals in Germany….just not as many as some had prophesized. For example, we bought a neat German business in the lighting industry last year.

Italy, the northern part in particular, has some interesting opportunities, more so in the middle-market side. Late last year we bought a division of Fiat that had a great management team. There are a lot of deals continuing to appear in the UK. France as a private equity market used to be more of a local, closed market because French private equity funds dominated that market. The question now is whether some of the pan-European funds will see more activity in France. Spain will see a major deal or two a year, Scandinavia will see several deals a year. In Eastern Europe there are some interesting opportunities in global industries. We have a deal in Romania in the wireless business, for example, that we’ve grown from a zero cash flow start-up to a firm that generates over $110 million cash flow a year.

The Harbus: Could you please talk about balancing your administrative role as a Managing Partner and your investment role as a private equity investment professional within the company?
JW: I loved building the business and that’s why I continue to love thinking about how to grow it into a sustainable business enterprise – something that lasts beyond me or any of my current partners. That’s probably part of my HBS training showing. To build a sustainable enterprise you have to think about the industry and the strategy and where we are going as opposed to just being deal focused. I also love deals, and that probably consumes 40% of my time. I am on boards of companies such as 800-Flowers, Guitar Center, House of Blues, Axis Insurance, MetoKote, and those are fun. I’d quit if I couldn’t do that. But part of my time is also spent raising money, recruiting talent, making sure people are communicating and sharing, making sure we have the right mix of deals in our portfolio, looking for good things that should be celebrated and problems that should be addressed. Firm management probably takes another 40% of my time, which is critical. And during the other 20% of the time I’m doing what I want to do and that is creating opportunities and ideas. I am also involved with JP Morgan Chase overall where I am a Vice Chairman.

The Harbus: What in your opinion makes a good private equity investor?
JW: Different funds have different formulas for building a successful private equity investor. We look for people who work best in a team.

We have a mentoring system where each person has a mentor who watches their careers and advises on development issues. All of our partnership sits down a couple of times a year and looks at everybody in the firm and talks about their development needs. I think this is unique and we’ve done this since 1988. We have a list of traits that we evaluate people on such criteria as being a team player, a good listener, intelligent, being creative, etc. One important question that we ask is “can this person market to managers and build relationships with them while still remaining a skeptic?” You can be an advocate for a deal, but you also must be able to step back and think about whether this is really a good deal. We also want people who are willing to take risks. A lot of people, particularly out of business school, have a hard time taking the personal risk of being vocal about issues and concerns. You need to be a positive contributor to a discussion…not just an observer.

The Harbus: What advice would you give to MBA grads these days trying to get into private equity since it’s a big topic of conversation on campus these days?
JW: What I find interesting is that I haven’t met anyone in the private equity industry who doesn’t like it, so I can understand why people would like to get in. But a lot of people in private equity have done a lot of things prior to getting here. You can go in direct from business school, no question, you should also think about getting in after a few years of working in another industry. Many times we have analysts who go back to business school and we bring them back. But if you are a new player, you have to ask yourself – what unique skills do you bring? What passion do you bring? Get excited about it! When you are talking to someone like us about a job this passion is shown by really having studied this business, you understand our competitors and you understand how you can add value if we give you a shot. Understanding private equity firms’ unique strategies and their unique needs is very important. You’re likely to find more opportunities in buyout oriented firms than venture oriented, because venture firms don’t hire that many newly minted MBAs.

Someone trying to get in our industry could also try to work in a portfolio company of a private equity firm where you can get exposure and experience. There are a lot of sick portfolio companies out there today that could use MBAs but you have to be willing to take a risk in those jobs. If you go there and company is fixed, you can talk about what you did to help and include it in your track record. If the company isn’t fixed and fails, you still gain great experience which is valuable if you want to get into private equity in the future. Don’t go into a management training program at some large corporation or any other place where you have to go through the ranks – there are not many hires into our industry from the middle ranks of large corporations or from consulting firms either.

The Harbus: Let’s talk a little bit about HBS.
JW: Sure.

The Harbus: What is your best memory of being here?
JW: My best memories are of the 80 people that were in my section. I still see and talk to a number of them all the time. Some of them are here today at the conference. Going through this experience together, through some hard times, building camaraderie, having teachers that we loved and the ones we didn’t really love (laugh) was great. We had some fabulous teachers such as Fruhan who was a star finance professor, or Mullins in the second year who later became a Vice Chairman of the Fed. I remember one of our sectionmates was an engineer and he, along with several others in our section, wired the electric chalk boards up and had a remote control at his seat with which he could operate the boards without anyone knowing. John Quelch, who was our marketing professor at the time and one of my most favorite professors, was teaching this class. And so that day Prof. Quelch went up to the board and started writing and, all of a sudden, the board would start rising or falling all by itself. At first, he thought it was a mechanical problem and he ignored it. Finally, after about 15 minutes of “fighting the boards” he figured it out and said “Ok, who’s doing this?!” The culprit admitted it and received a standing ovation from our section. What a great way to build a team spirit.

The Harbus: Sounds exactly like the legacy we inherited from you.
JW: (laughter)

The Harbus: Which section were you in?
JW: Section E, 1981. Our reunions are great, people usually come back and you will want to come back every 5 years and get together with your sectionmates. This will keep you together. It is unique and special.

The Harbus: What is your worst memory of HBS?
JW: My worst memory is when our managerial economics professor committed suicide. He was going through some hard times personally, but he was also our section advisor. He was very close to us and some people in our section had had drinks with him the night before he committed the suicide. We all went to his funeral, and I can still remember the violin playing during the service. It affected us all.

The Harbus: What do you do in your spare time?
JW: It’s really important for me to have a good work-life balance. I spend a lot of time with my family; I have four kids – 15, 14, 12 year olds and a 4-year old whom we adopted from South Korea.

On the non-profit side, I am a Thomas Jefferson fanatic, and I am on the board of Monticello which is his home and library in Charlottesville, VA. I am also very active in several non-profits in New York, one of which in particular (NPowerNY) I created brings technology to other non-profits and trains inner city kids to become technology professionals. We have been very successful in growing that. I also enjoy golf, visiting new places and listening to music. I love creating new businesses and ideas.

The Harbus: Thank you very much for your time, Mr. Walker.
JW: My pleasure.

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