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Wednesday, 14 November 2018

Cavanagh quits JPM. Who can blame him?

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IFR Editor-at-large Keith Mullin sifts through a major IB exodus.

What on earth would make someone as close to Jamie Dimon and as senior at JP Morgan Chase as Mike Cavanagh quit – even to take up an attractive and newly-created position of co-president and co-COO of The Carlyle Group? It’s a question that only he knows the answer to, but it did cause a bit of an intake of breath when it hit the wires.

Would he have left for the money? Who knows? I can only rhetorically ask whether ditching the US$10m a year he’s on now for closer to the US$100m a year he could be on – and which is what Carlyle’s three multi-billionaire founders are currently pulling down – is a big enough pull. But it sure looks good on paper.

Was being co-CEO of JP Morgan’s Corporate and Investment Bank just not enough? Had the challenge gone out of the job? After all, JP Morgan’s behemoth CIB is a world-beater in many areas. The division generated US$36.1bn of net revenues last year; its US$9.7bn of 2013 net income had risen 32% over three years; and on the basis of the US$56.5bn of capital allocated to CIB, the division made a 17% ROE. Not bad in the midst of an industry struggling to make ends meet.

JPM’s revenue line is pretty well distributed across product and geographical lines, too. Like everyone else, FICC dominates product revenues while in terms of geography, half the revenues come from the US and a third from Europe, which is kind of where you’d want them relative to the opportunities. You could argue (which I have done in the past) that the bank’s Asia business is in need of attention, accounting for just 13.5% of net revenues. But if getting that up a few points is important, it’s hardly an issue of strategic importance to occupy the urgent day-to-day attention of the divisional heads.

Similarly, if on a year-to-date basis Goldman Sachs has overtaken JPM in the global IB fee rankings, it’s still early days and I doubt that’s going to keep anyone awake at night.

Boring at the top

Is it possible to get bored of just having a ton of leadership positions? Was partnering with Daniel Pinto not working out? There was certainly no external indication of anything untoward. While the two were partners, they had each taken responsibility for the two main groups in CIB; Cavanagh focusing on investment banking, the global corporate bank and treasury services; Pinto overseeing markets and investor services including fixed income, equities, commodities as well as prime services and securities clearing.

Did Cavanagh conclude last year that his chances of replacing replace Dimon when the chairman and CEO finally calls it a day had slipped away? Maybe waiting the five years or so before he finds out was simply too long. Perhaps more to the point, Matt Zames’s vertical rise from co-head of fixed-income in the investment bank to become group COO after his deft handling of the ”London Whale” affair put him in pole position to take the corner office.

To be honest, the succession story at JP Morgan certainly has less intrigue about it now than it once did. That’s probably partly intentional. Removing Bill Winters from the succession race in 2009 was seen as a brutal survival strategy for Dimon, while “elevating” Jes Staley to the CIB chairmanship in 2012 was a clear signal that his time had come so he decamped to hedge fund BlueMountain Capital around 15 months ago.

So who’s left and does Dimon see any threats? I doubt it. In the divisional slots, Pinto made out nicely from Cavanagh’s departure as he’s now sole CEO of CIB. The highly regarded Mary Callahan Erdoes continues as CEO of asset management; Doug Petno (an investment banker by background) runs commercial banking while Gordon Smith runs consumer and community banking. Marianne Lake is the also highly regarded CFO. The leadership group looks pretty settled.

Fun-seeking?

Maybe Cavanagh just figured out that banking has become boring because banks are being forced to adopt dull utilitarian business models and the industry is becoming heavily and overbearingly regulated and banker-baiting is not going away any time soon. Maybe he also figured that the drive and innovation were morphing into the shadow banking sector and if that’s also where the real money is too, why not go with the flow?

He’s certainly got a good gig at Carlyle, whose US$189bn in asset under management puts it at the pinnacle of its industry. And with only around 1,500 employees, it’s eminently manageable. Cavanagh will partner up with Carlyle veteran Glenn Youngkin. Both will be tasked with running the firm on a day-to-day basis. Cavanagh is joining the executive group so will get ample face time with Carlyle’s three co-founders: chairman Daniel D’Aniello and co-CEOs William Conway and David Rubenstein.

The founders are now all in their mid to late 60s. The fact that Cavanagh is 48 and Youngkin 47 makes this a clear exercise in leadership planning. If such an opportunity were offered to him, you can’t blame him for taking the bait.

It’s also clear that as the mega private equity firms and hedge funds build out their core offerings and now increasingly look like full-service but still largely unregulated investment banks, there will be increasing levels of talent slippage out of the investment banking sector as the drudgery in the latter persists.

Carlyle closed its Carlyle Partners VI buyout fund in November 2013 at US$13bn after almost two years of fundraising, pulling in 269 investors. Fully leveraged up even on modest multiples, that’s a lot of LBO firepower. Maybe Cavanagh figured being a principle in the burgeoning M&A cycle rather than scrapping for advisory roles was just going to be a whole lot more fun. And you know, he’s probably got a point.

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