The Exchanges

Q How do you think of layering in taxes?

A I'll start by saying we don't give tax advice. It's interesting because there's two sides of the tax equation. One is the fact that just over 40% of the capital that we allocate to fund managers comes from non-U.S. clients. So there are certain structures that in private credit are much more beneficial to non-U.S. investors, like a business development company. Whether it's traded or non-traded, public or private, the fact that you're not paying the same effectively connected income as a non-U.S. investor changes the entire return stream. There were funds that on average in the direct lending space would take off 200 basis points of return if you were a non-U.S. investor. BDCs help some of that. So there are structural differences, and then anything real assets oriented, real estate, infrastructure, they were part of that effectively connected income world. So a lot of that you can solve for in structure today. A lot of it, not all of it. For U.S. taxpayers, there's this whole shift that's taking place around asset location, not just asset allocation, and so it started in the long-only side, and even on the ETF side with some of these, like, smart tax-aware strategies, or tax-loss harvesting, that's moving into alternatives. We've tried that In places like doing insurance dedicated funds, and there's differences between whether you want an annuity, a non-annuity, I still think …

AI assessment note: “there's two sides of the tax equation. One is the fact that”

Q When you talk to a client about the choice of an evergreen fund or a drawdown vehicle, what's your expectation of the return dilution because of the liquidity provided by the evergreen fund?

A Most of these fund managers in the private market evergreen space, there's still less than 500 of them that exist today. Hold anywhere between 15 to 25% in liquid securities, and they do charge higher fees. In certain areas like credit, it's actually pretty minimal. Most of our senior secure direct lending, we've moved almost entirely to evergreen portfolios. In private equity, I would still say our first thought is start with a drawdown fund for most of the managers that we're looking at, and then think about the evergreen portfolio. But Return dilution is anywhere from two to 500 basis points. The question is, is it really dilutive to you? Were you investing the uninvested cash? Because a lot of these firms make assumptions that your uninvested cash, you're still earning six, seven percent. A lot of people just don't. They leave it in cash because they just never want to be in a situation where they can't fund a capital call. So when we advise our clients about it, we first ask them 10 questions that are really about how do you invest your uninvested cash? How do you think about Making decisions over the long term. How do you think about vintage or diversification? There's still a significant portion of our clients that only ever invested in one fund. And then they were like, we'll wait for it to see returns, and the J-curve is a real thing that takes three to four years. Mor…

AI assessment note: “Return dilution is anywhere from two to 500 basis points.”

Q This movement of capital and alternatives, why is it happening now compared to the noise about democratization of alts or the hedge fund structures, 1015 years ago?

A It's probably twofold. For many, many years, I had to convince great general partners to want private bank capital, individual's capital, and a lot of people just saw it as way easier to go to some institution, work really hard with a CIO, And get a hundred million dollar check. And they didn't want to deal with all the administration of the tiny little tickets. We've been investing since the eighties and nineties. In the early 2000, we really started going to some of the best GPs in the world to partner with them. And they just did it as an experiment. They just wanted to try it out. They'd give you fifty million or two hundred million dollars. And then all of a sudden, oh eight, oh nine happened. And there were certain asset classes like private debt and real estate that were ahead of others in terms of accepting individuals capital. And appreciating that it was very diversified capital. The re-up rate for individuals is pretty high, but especially for a firm. I might not have the client re-up with you if you're a GP, but I likely have new clients that also want to invest. The diversification aspect of it is a significant one, and then all of a sudden you run into a twenty-twenty-two period where if you're an institution and you're tied to a mandate and you can't have more than 17% in private equity, it doesn't matter how good that GP is. You're not going to your board to get…

AI assessment note: “The reason why most recently it's interesting is because one, people are reminded”

Q Interval funds have started expanding in use, particularly in private wealth area. What's your take?

A We hadn't done much up until recently. We are creating our own. As the industry evolved in private credit, which is the main source of the interval funds, we preferred tender offer funds versus interval. We preferred the concept that in some of the worst market drawdowns that a fund manager could or a board could say it's not the right time to sell. The industry has now evolved and it's mature enough to think that there are appropriate interval funds out there. And as a portfolio manager, if you're managing a portfolio of underlying funds, you love interval funds because you know that you're going to find some way to get that capital back. Our view on it is certainly shifting over the last couple years, but I still think there's some places like in the non-traded REITs and other places where I'm glad that they had more of the tender offer feature to them. A lot of people built interval funds to access the retail investor, and it came with a lot of fees and a lot of stuff in them. We were buyer beware for a long time, and there's more choice available, so there's more competition from a manager perspective to make sure that the economics are appropriate.

AI assessment note: “Our view on it is certainly shifting over the last couple years”

Q When you aggregate all the investment activity you're doing, there's a lot of market power you're bringing to bear as a big investor in the space. How do you think about the right level of extraction? So you could think about that as a fee discount for your client. You can think about it as a partnership with the manager where you're Part of a GP.

A It'll depend on every subsector. Private credit's a good example of where when you invested 10 years ago, you would make sure that you weren't paying on committed capital, you'd pay on invested capital, but as the returns come down, so should the fees. We're always focused on the net return, and then we're making sure that whatever the economics that a fund manager is driving is truly either for their business or for future investments. We rarely take GP economics. We do from time to time. But we're mostly focused on how do you generate the best net returns? If we're going to bring in institutional size capital, we want to make sure that we get most favored nations and that discount. We'll work hard to get those for our clients because we think it's appropriate. So you always want to balance not pushing a manager too hard on that because you want to make sure that if they have a new generation of partners that are coming up in venture and growth, you don't get a lot of that carried interest for several years. So Paying a higher management fee is more appropriate, but then making sure that there are step-ups in economics is important. It'll depend on each sub-asset class. Lower returns, we obviously are going to continue to drive returns. Economics lower. For the higher return-oriented places, it's just understanding what the waterfall is going to be. I would also say when there…

AI assessment note: “We rarely take GP economics. We do from time to time. But we're mostly focused”

Q So working your way up in private wealth, how do you think about putting a scope around what J.P. Morgan's private wealth business is?

A The earnings reports and stuff will come out with the almost three trillion dollars that we have within that space. Alternatives as a piece of that is significant. It's not as significant as the portfolios that we manage on behalf of clients, which is almost a half a trillion dollars, but a lot of what we do in alternatives, which is about a hundred and seventy eight billion dollars, where we allocate to a lot of non JP Morgan, but also JP Morgan portfolios is a piece of the portfolios. The client base themselves is what differentiates us. Anyone that has a few million dollars to several billion dollars If you include our full wealth spectrum, it includes Chase, which is one of two households in America, all the way through to the institutional side. Private bank in particular, we'd been focused for the last many years on families that had anywhere from five million dollars of net worth and above. And then those that participated in alternatives, partly by nature of it, because they had to be qualified, skewed higher. But we have incredible insight because we cover 1419 hundred billionaires in America. We cover a decent amount of those outside the U.S., and so whether you're investing a couple 100,000 or tens of millions of dollars, we have to have this suite of products to offer all client bases, which is fun.

AI assessment note: “earnings reports and stuff will come out with the almost three trillion dollars”

Q With such a wide range of clients, how do you organize your effort to create those portfolios and service the very many different clients that you have?

A It's all going to be based on client needs, which everyone's going to tell you, anyone that serves the clients in these areas, because a client that's a business owner is going to be very different than a financial institution type client. That's going to be very different than someone that's inherited wealth and trying to thinking about how to preserve it. But we do have goals based planning that we try to understand the needs of a client's portfolio. Do you want income? Do you want higher returns? Do you want a mix? I'm going through the process now as a client to figure out what are the goals in your portfolio? So I'm answering a bunch of questions. They put it in a proprietary system to figure out What the output of that is, and then how you actually want to make decisions and invest will come after. So then how we get organized is we have a whole group that's all about understanding the client. How do you actually make the decisions of building and preserving wealth over time? What are your goals? We have a whole separate group that then they speak to to say, what are the components of how we build those things? Do you want to do it yourself? Do you want us to do it for you?

AI assessment note: “how we get organized is we have a whole group that's all about understanding the client”

Q How do you think about the size that a manager can deploy?

A Size definitely matters. That was a mistake of a lot of what happened pre the GFC and then post the great financial crisis. I would say, though, there's some of these managers that everyone would always say, how can you raise fifteen billion dollars or twenty billion dollars and deploy that appropriately? If you look under the hood to figure out, have you increased the size of your team? Has your deal size changed? Have your return drivers changed? Have the partners changed? There's a whole generational shift happening in the world of private investments right now that we're talking about. The size doesn't totally scare us. We try to think what's the expectation of you to persist from a return perspective. So if you look at the private equity industry, the data tells you that over the last decade, half the returns came from multiple expansion. That's not good or bad necessarily, but that's not going to persist. So where we've always focused in core private equity as an example is managers that can drive three quarters of the return from proper operational improvement, driving earnings, driving revenue, and thinking through if you do cut costs, is that good or bad? And do you invest it back in the business? Size doesn't totally matter, but in our portfolios, there were these shifts that we made, like in 21 and 22, we started moving more into the core middle market. And in parts …

AI assessment note: “Size definitely matters. That was a mistake of a lot of what happened”

Q What initiatives do you have on the come that you're excited about?

A We've spent a lot of time lately on themes outside the U.S., so whether it's places like Japan or developed Europe, sports media entertainment is an ecosystem that we as a bank have a lot of intelligence in, both from our clients and our overall capabilities in that space. As those markets open up to private market investors, at the end of last year was things like the NFL opening up, there's a lot of things changing in baseball, hockey, etc., And it's a place that our clients understand and are really interested in. We have favored more of the lending side to the equation. We'll probably make some investments on the equity side. And if you believe that volatility is here to stay, the concept of thinking through portfolio resiliency. When we came out with our outlook for the year and the things that we were most focused on, it was the number one most click thing out there. Like our clients are really trying to think of understanding the concentration in public markets, especially in things like the S&P. Understanding the role that equities and bonds play with each other and figuring out where there's places where you can access some of these megatrends.

AI assessment note: “We've spent a lot of time lately on themes outside the U.S.”

Q Then even if you're doing it on behalf of clients, you're still managing a large war chest compared to the potential opportunity set. So how have you gone about trying to get access to the funds you think are important to have in the venture side?

A In the private equity group, they were day one investors and probably in eight of the top 10 since the beginning. So they've had super long-term access. If you look at our client portfolios, even for the largest families, venture allocations was still less than five percent. It was 4.85%. So we do have a big client base. We do have a lot of capital at work, but the allocations are still small. There's other parts of the venture market that are opening up like secondary venture. So a lot of our clients love that area because you can build diversified portfolios and There's only a few managers that do it really well, we think. We're at this point in venture where everything's changing, where there's a ton of spin-outs, and there's, just given the market environment over the last couple years in terms of valuation reset, the dollars available versus the dollars that are being raised, how we talked about venture 20 years ago versus how we're gonna talk about it for the next even five or 10 years will be drastically different. The banking system as a whole changed the way in which we serve venture, and when We acquired even like First Republic. It opened up our eyes to a lot of those clients within that community, and I just finished a conference of our top 82 founders and top 50 venture growth managers, and we're building this ecosystem on this innovation economy that everyone from…

AI assessment note: “they were day one investors and probably in eight of the top 10”

Q So your turnover to private credit, the structure of where assets are filling private credit is totally different, much more concentrated. How have you thought about that and bringing that asset class to your clients?

A We started allocating in oh seven. There was certainly differentiation as this whole shift was happening out of the banks and into the private markets. A lot of people talk about how new this asset class is. We don't think it's new. We just think it's shifted. Although I did see within the overall private credit industry, you now have to differentiate between direct lending. So you think of the corporate private credit market, someone said something like three trillion dollars and a trillion and a half has been raised. But then you look at asset back lending and it's like over a 20 trillion dollar market and only a half a trillion dollars been raised. So All these things are shifting, but if we started on the direct lending side, and we started with large-scale managers, that's where we thought there was going to be a benefit to not just having beta, but also generating a little bit of alpha. And it makes sense. Most of those individual companies want to deal with one lender in a time of crisis. So we've skewed in the direct lending side towards larger-scale managers. As that market continues to evolve, and as the banks start to get back into some of these areas, we do think returns are going to come down. Probably by about 200 basis points on average. And then in the opportunistic credit side, we actually like those that can focus on micro cycles to be smaller managers. So we …

AI assessment note: “if we started on the direct lending side, and we started with large-scale managers”

Q How do you organize the information from that frontline conversation with the founder to the manager research person who's having a conversation with a healthcare VC?

A A lot of people say we have X number of meetings a year. Just our investment professionals, we've tracked for the last several years over 3000 meetings a year. There's a lot of people that do that. But most of the time at J.P. Morgan, we joke that it's bringing the J.P. Morgan bus. It's people like myself that work with clients. It's the portfolio manager. It's the diligence person that we're all building and learning together. That sounds very inefficient, but in practice it works just the way in which we run discipline around trying to give quick no's and spend time on the longer yeses. We can pretty quickly distill down who are like our top 15 to 25 targets in a certain area, or the companies, based on some of the cross-line of business partnerships and so forth.

AI assessment note: “we joke that it's bringing the J.P. Morgan bus... we're all building and learning together.”

Q So if you looked at some of those sub-sectors, and maybe just grab private equity as an example, what does a market map of private equity look like?

A So after twenty-twenty-one, we recognized that our clients, those who were choosing a la carte, were overweight growth allocations. So we said, should we be investing behind value? When capital markets started closing up in 22, we said, should we be allocating to more of the mid-market? They use a little bit less leverage, maybe two turns less on average. They have more exit opportunities. They can potentially buy cheaper depending on what their skill set is. So we'll do a market map that says who are the 15 managers that are raising capital today that meet our minimum return threshold that are willing or wanting to partner with us, want the diversification of private bank capital, and we look through it together and we literally go out and just meet all these managers. The last couple years we were investing in places like Asia, About 10% of our portfolios, even though on an a la carte basis, there was less demand from clients. Same thing in growth and venture over the last two to three years. We were still making sure it was 20 to 25% of the portfolio, even though a lot of folks were digesting what they'd done in 2020 and 20 21. So the market maps will say, how do we make sure that we're investing to build a portfolio over four to five years to make sure that every piece is complementary to the existing piece. But you also don't want to Work with five managers in the same spa…

AI assessment note: “we'll do a market map that says who are the 15 managers”

Q You mentioned starting to invest more in venture. How do you bring something that historically has pretty tight capacity constraints into a large-scale platform?

A We did some analysis because we hired someone to lead our venture and growth initiative maybe seven years ago. In 2012, 2013, when sort of the hybrid crossover market and growth equity market really started opening up, we only had a couple managers. He came in and maybe 17 or 18, and he said, you're doing a lot of elite stage growth, which has worked, but if you really wanted venture returns, and we know that the dispersion in private equity is 17% between Top and bottom quartile. In venture, it's something like 27%. You probably shouldn't invest unless you're going to get access to some of the best. A lot of people assume that the best were like the best names, the longest term names, and he had this view that it was really funds that were between fifty and two hundred fifty million dollars. But a lot of our clients, to your point, can't just allocate capital. The venture firms aren't going to be able to grow with you. So there's places like venture where we'll build portfolios. It's one of the places that we tell our clients to consider fund to funds. There are some that have gotten over the concept of fund to funds for core portfolios, but in venture, it's certainly somewhere where it's one of those things that's hard to do yourself, pick and choose, not to mention the choice isn't available. And you don't want to work with the firms that just need capital. And then the ques…

AI assessment note: “It's one of the places that we tell our clients to consider fund to funds.”