We learned a lot last month when Goldman Sachs (GS) tried raising over $1 billion from wealthy clients to invest in Facebook. Stuff about SEC marketing policies, shareholder limits and the social network’s underlying financials. Above all else, however, we learned the following equation:
Today we have our second “proof,” with news that JPMorgan Chase (JPM) is raising a fund that will invest in late-stage digital media companies. The original report seems to have come from the NY Post, which said that the bank was raising up to $1 billion, including $200 million earmarked for an investment in Twitter. The WSJ suggests the target is between $500 million and $750 million, and includes no mention of a Twitter earmark.
Not too many other details have emerged, but that hasn’t stopped lots of outlets from writing about it. But this fund is remarkably unimportant. So let me list the reasons why (and, yes, I do see the irony in further publicizing about something I decry as being over-hyped).
1. JPMorgan does not have an agreement to buy $200 million worth of Twitter shares, according to a source familiar with the situation. Instead, the figure is an “aspirational” one, related to JPMorgan’s hopes that it could acquire such a position on the secondary market. At least Goldman Sachs had an actual deal in place with Facebook, at a pre-determined valuation.
2. Raising a later-stage fund for social media companies in 2011 is about as original as Lady Gaga’s new single. This isn’t to say that it can’t produce strong returns for investors, but such returns are unlikely to be any better than those of its peers (particularly if it’s buying secondaries).
For example, Kleiner Perkins raised $750 million for a digital growth fund last year. Insight Venture Partners is about to close on more than $1.25 billion for its latest fund (not to mention an associated co-invest vehicle). What do those firms have in common: They already have investments in Twitter.
3. This is hardly the first time that JPMorgan has made a major commitment to venture capital (ok, we can quibble over whether $200m into Twitter is “venture capital” or not). All the way back in 1984, “Chemical Bank” launched a captive venture capital and buyout unit that later would ramp up into one of the market’s most active investors. Later it was renamed Chase Capital Partners. In fact, my first-ever magazine cover – for Investment Dealers’ Digest — was about the group. The accompanying image was of a faucet with dollars puring out toward a drain.
By the time that Chase was acquired by JPMorgan, the idea of an in-house unit was beginning to look much less appealing. Not only were there all sorts of concerns about conflicts-of-interest, but bank management was tired of explaining J-curves and other private equity banalities during quarterly earnings calls. So in 2005 the bank announced plans to spin out the group — now known as JPMorgan Partners — into a pair of independent units: CCMP Capital for growth equity and buyouts, and Panorama Capital for venture capital (it also held onto a separate buyout unit called One Equity Partners).
In other words: We’ve seen this story before at JPMorgan. There obviously are some differences this time around — such as how the bank apparently isn’t putting any of its own capital to work this time around (a lack of interest alignments that should worry prospective investors) — but JPMorgan has plenty of institutional experience with the asset class.
Ok, enough discussion of this. But I’m sure we’ll be back at it once Citi or BoA begins raising money to invest in Zynga…