J.P. Morgan Chase & Co. has been trying to shed some of its holdings in venture capital and buyout funds in recent months through its private equity arm, J.P. Morgan Partners.
But after using the secondary market for a $1 billion sale last year, the firm has turned to another outlet to rid itself of risky venture capital and buyout positions: fixed-income buyers. 
Morgan Chase has created a bond the first of its kind in the United States that is expected to total $600 million to $800 million, a source close to the deal said. The bankers modeled the security, called Porter Global Private Equity Ltd., after a similar vehicle created by Partners Group, an investment firm in Switzerland, the source said. The bond is to be placed by Merrill Lynch & Co.
Morgan Partners is shopping the bond around to gauge investor interest, the source said. It is unclear if the bank is having success, but some sources said the process is taking longer than Morgan Chase anticipated.
Spokesmen from Morgan Chase and Merrill Lynch declined to comment for this story.
It is the latest in a growing trend of banking companies attempting to come up with new solutions to offload some of the private equity investments they have built up in recent years.
Deals in the secondary market typically have all the investments completed before the sale. But the Morgan Partners deal is different: Only one-third of the Porter Global bond portfolio would be invested at the time the bond is sold, presenting a greater risk to buyers. In this case bondholders would be stuck with decisions made by the general partners after commitments have been made. The bondholders would be protected by insurance issued by an international insurance agency, the source said.
The cash flow for the bond payments would come from the returns on the private equity funds, which will be as many as 100, the source said.
Morgan Chase, though the first U.S. bank to attempt to sell limited partner interests in the form of a bond, is not the only bank that has sold private equity investments to the secondary market.
Banks, like insurance companies and pension funds, often sell private equity interests to liquefy capital for new investment purposes. Banks also tend to rid themselves of these commitments once the relationships are milked for other banking deals or when two banks merge.
When banks sell their private equity positions the reason is almost always related to capital reallocation and is rarely a result of the performance of the portfolios, said Nick Harris, a general partner at Lexington Partners Inc., a New York firm that participates in the secondary market.
Traditionally, banks and insurance companies have been the largest sellers of these private equity partnership interests, and they continue to be, Mr. Harris said. Some banks think of private equity partnerships as a quasi-liquid security, like they think of other asset classes that they can sell or trade as needed, he said.
Last month Bank of America Corp. sold portions of its portfolio to Credit Suisse Group, Landmark Partners Inc., and Pantheon Ventures Ltd. for about $400 million. Lexington Partners purchased a portfolio of U.K. and European companies owned by NatWest Equity Partners last October a deal valued at $1.1 billion when the Royal Bank of Scotland acquired NatWest Bank.
The secondary market is relatively small, with few investment firms taking active roles. Lexington Partners is the largest secondary firm in the United States, equal to the next three largest players: Landmark Partners, Coller Capital, and HarbourVest Partners, according to Mr. Harris.
The secondary market business is driven by how much money has been committed to the private equity market in a five-year period, Mr. Harris said. Over the past five years $400 billion has been committed and about $100 billion in the previous five-year period, he said. Historically 3.2% of all the money committed to new funds ultimately gets traded on the secondary market, he said.
Venture capital investments slowed in the first quarter to $11.7 billion, compared with $26.7 billion in the first quarter of 2000, according to data released Wednesday by Venture Economics and the National Venture Capital Association.
In November, Lexington Partners led the $1 billion secondary deal with the former Chase Manhattan Corp., the largest secondary sale to date, Mr. Harris said. In September, Chase Capital Partners, the predecessor of J.P. Morgan Partners, initiated a process to sell a portfolio of 70 interests in various buyout, mezzanine, venture capital, and international partnerships to which the bank originally committed a total of $1.5 billion, according to Lexington Partners.
It appears as if Morgan Chase is turning to fixed-income buyers because it wants to expand its options rather than because the traditional secondary market is tapped out.
I dont think the product is evolving because of the lack of capital for it, said Chad S. Alfeld, a vice president at Simsbury, Conn.-based Landmark Partners. If the bank wanted to sell the positions to secondary buyers, the capital is available to do so.
The difference is that in the original Chase transaction the average age of the private equity stakes was three to four years old, Mr. Harris said. Most secondary buyers traditionally buy stuff that is two, three, four, five years old.
Morgan Chase is now looking for investors to make somewhat of a blind commitment. Secondary buyers can see what you are buying when you buy it, Mr. Harris said.
In this case, he added, an investor is betting more on the ability of the general partners to ultimately deliver returns.
Buyers in the secondary market seem to believe that Chase created the bond to reap a higher return. In secondary deals there is generally some level of discount pricing to net asset value, but in the new bond deal Morgan Chase is trying to push the sale out more at par level, one investor in the market said.
I think its something that could get done, but in the current market environment, Im not sure, one investor said.
