JPMorgan sees new bank role in buyout financing

By Richard Barley

LONDON (Reuters) - The credit crisis is changing the traditional relationship between banks and private equity firms in the financing of buyouts and investment, a senior JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) banker said on Tuesday.

Banks are likely to be far more focused on their return on capital rather than relationship banking and distribution as a result of the market turmoil, which is forcing credit teams to be far more discriminating about who they lend to.

As a result, JP Morgan is set to look further beyond the traditional bank role of providing the senior debt in a buyout, said Karen Simon, head of the bank's financial sponsors group for EMEA and Asia.

"In terms of holding the loan asset class on our balance sheet, we hold our fair share just like anybody else, but we're not going to over-invest in that as an asset class," Simon told the Reuters Hedge Funds and Private Equity Summit in London.

"What we can do is invest in the equity, invest in the mezz, we can invest in different parts of the capital structure where frankly we're going to get a better return for our capital, a better use of our balance sheet, and help our client."

As examples of how the bank is doing this, Simon cited the recent hiring of the co-founders of TVG Capital Partners in Asia. The bank has earmarked $750 million to invest alongside its corporate and private equity clients in Asia.

The leveraged loan market seized up as the credit crisis bit last summer, leaving banks with commitments to buyouts that have proved largely impossible to syndicate -- something Simon said is not holding them back from considering new business.

Still, prices for senior debt, even on credits that are performing well, have fallen to unprecedented lows. European loans are trading in the mid-80s percent of face value on average, according to Reuters Loan Pricing Company.

NO LONGER THERE

The shift in investment focus also reflects the imperative to change the business model due to the disarray among debt investors.

"We have historically, in the last three years, largely been an agency business: we basically distribute," Simon said. "Now the people we distribute to are no longer there."

The investor base for buyout debt has changed rapidly in recent years, with increasing numbers of collateralized loan obligation (CLO) funds and hedge funds accounting for large chunks of buyout debt.

Now these investors find it difficult, if not impossible, to raise fresh money to invest or the leverage they need to produce returns -- and the make-up of the market may have changed for good.

"I'm very bearish on whether or not the fund market will come back in size," she said. "It will come back, but I don't think it will come back in size.

"I think you're looking at a different capital market structure ... for at least the near term."  Continued...