JPMorgan Chase & Co. (JPM) is set to bail out its cash-strapped Junius Real Estate Partners Fund by investing $110 million as the initial capital. This move was necessitated after the fund failed to generate adequate capital amidst tough financial backdrop.
In early 2011, JPMorgan’s asset management division had launched Junius Fund to earn good returns by focusing on identification and execution of new investment opportunities through a strong investment team backed by the solid infrastructure of the company’s asset management division. Currently, the fund is developing properties worth $465 million. These properties include a resort in Virginia, an equestrian farm, along with a shopping mall in Chicago and investments in an Ohio-based hotel chain
Prior to the recent crisis, several firms supplied capital to their real estate funds to keep them well-poised to execute any new investment opportunity that comes along. However, with crashing of the real estate market and the stringent regulatory landscape, the banks have become cautious of perilous investments. Moreover, in such a tough economic scenario, wary investors do not want to jeopardize their money by investing in a relatively inexperienced fund. Consequently, JPMorgan had to announce the slowdown in its efforts of building the $750 million fund.
With Junius in dearth of sufficient funds, the parent company had to pitch in for the rescue effort. JPMorgan’s plans to invest $110 million of capital may not comply with the Volcker rule. The rule suggests that banks should not invest more than 3% into their own funds. However, some solicitors are of the opinion that JPMorgan will unlikely be in trouble because the fund operates as a non-conventional real estate fund, and as a result does not fall within the purview of the rule.
The real estate market is not booming as it did prior to the crisis. This has prompted several big organizations to reduce their activities in this arena. Banking giant Citigroup, Inc.(C) vended its real estate fund to Apollo Global Management, LLC (APO). Other big names like Morgan Stanley (MS) have initiated new funds, but with a relatively lower target.
JPMorgan’s efforts to keep the fund balanced are credible. The company hired some of the prominent faces of the real estate world to manage the fund. Moreover, it was ready to provide 3% of the fund’s capital requirement and had supported it strongly through its flagship asset management division. However, with the sluggish economic recovery, especially the real estate market showing no signs of betterment, the fund was in danger of running into trouble. Therefore, we believe that JPMorgan’s rescue effort is justified.
Currently, JPMorgan retains a Zacks #4 Rank, which translates into a short-term Sell rating. Considering the fundamentals, we also maintain our long-term Neutral recommendation on the stock.
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