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Summary

  • One of the leading candidates to succeed Mr. Dimon at JP Morgan was Mr. Cavanagh, who recently left the mega-bank for the private equity firm Carlyle Group.
  • This exit by Mr. Cavanaugh has been part of a large executive turnover at JP Morgan post-London-Whale fiasco.
  • We are upbeat on Carlyle's future prospects, given the new addition to its team, potential partnerships, and current high yield.

Greener Pastures in Private Equity

Mr. Cavanagh, one of the leading candidates to succeed James Dimon as CEO of J.P. Morgan (NYSE:JPM), has exited the banking sector, in favor of private equity.

Mr. Cavanagh, 48, decided to join the Carlyle Group LP (NASDAQ:CG). Cavanagh's move bodes well for Carlyle's stock price-and elicits questions as to why he left such a potent position at the mega-bank.

Since the financial crisis, the power on Wall Street appears to be shifting towards hedge funds and private-equity firms-as opposed to highly regulated banks with many legacy issues. Private equity does not face the same regulatory burden as banks, and the pay at private-equity firms is often higher as well.

Industry analysts are beginning to worry about a brain drain. "I don't want you to leave, so think about it," Dimon told Cavanagh, according to The Wall Street Journal. Cavanagh is the latest in a number of high-level departures from the executive ranks at J.P. Morgan.

J.P. Morgan's Loss Is Carlyle's Gain

This latest development is a bad sign for J.P. Morgan's stock. The biggest bank by assets, J.P. Morgan has been shaken by management turnover since the London Whale fiasco about two years ago. In addition, last year, J.P. Morgan agreed to a multi-billion settlement with U.S. regulators over its previous mortgage practices. See our previous article on additional past JPM scandals here.

Cavanagh will become the co-chief operating officer at Carlyle. His new role includes taking part in strategic decision-making at the Washington, D.C.-based firm. Carlyle segments its business into the following categories:

  • Corporate Private Equity;
  • Real Assets;
  • Global Market Strategies; and
  • Fund of Funds Solutions.

The firm established itself through leveraged buyouts.

In recent years, several private equity firms have gone public. Aside from Carlyle, Kohlberg Kravis Roberts (NYSE:KKR), The Blackstone Group (NYSE:BX), Fortress Investment Group (NYSE:FIG), and Apollo Global Management (NYSE:APO) have floated shares. Since its debut less than two years ago, Carlyle's stock has increased by about 60%. Publicly listed private-equity firms are a bit unusual in that they need to satisfy both their Limited Partners and public shareholders.

Carlyle Looks Promising

Many institutional investors, including university endowments and public pension plans, aim to invest a fixed percentage of their portfolios in the private-equity asset class. One of the risks of private equity is that the underlying investments can be illiquid. Accordingly, investors in private-equity funds tend to have long time horizons.

Private equity firms are increasingly looking to partner with more traditional asset-management firms. Carlyle is reportedly considering such a move. Currently, CG has a high yield of 6% and a market capitalization of about $10 billion. We are upbeat on Carlyle's future prospects.

J.P. Morgan Continues to Have Issues

Given the continued brain drain at JPM, we reiterate that shareholders should consider taking profits in this mega bank and consider reinvesting the proceeds in private equity firms like the Carlyle Group.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: J.P. Morgan's Jamie Dimon Loses Top Protégé