JP Morgan Chase 2005 Annual Report Download - page 56

Management’s discussion and analysis
JPMorgan Chase & Co.
54 JPMorgan Chase & Co. /2005 Annual Report
Selected income statement and
balance sheet data – Private equity
Year ended December 31,(a)
(in millions) 2005 2004 2003
Private equity gains (losses)
Direct investments
Realized gains $ 1,969 $ 1,423 $ 535
Write-ups / (write-downs) (72) (192) (404)
Mark-to-market gains (losses) (338) 164 215
Total direct investments 1,559 1,395 346
Third-party fund investments 132 34 (319)
Total private equity gains (losses) 1,691 1,429 27
Other income 40 53 47
Net interest income (209) (271) (264)
Total net revenue 1,522 1,211 (190)
Total noninterest expense 244 288 268
Operating earnings (loss) before income
tax expense 1,278 923 (458)
Income tax expense 457 321 (168)
Operating earnings (loss) $ 821 $ 602 $ (290)
Private equity portfolio information(b)
Direct investments
Public securities
Carrying value $ 479 $ 1,170 $ 643
Cost 403 744 451
Quoted public value 683 1,758 994
Private direct securities
Carrying value 5,028 5,686 5,508
Cost 6,463 7,178 6,960
Third-party fund investments
Carrying value 669 641 1,099
Cost 1,003 1,042 1,736
Total private equity portfolio
Carrying value $ 6,176 $ 7,497 $ 7,250
Cost $ 7,869 $ 8,964 $ 9,147
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) For further information on the Firm’s policies regarding the valuation of the private equity
portfolio, see Note 9 on pages 103–105 of this Annual Report.
Private equity
2005 compared with 2004
Private Equity’s operating earnings for the year were $821 million compared
with $602 million in the prior year. This improvement in earnings reflected an
increase of $262 million in private equity gains to $1.7 billion, a 15% reduction
in noninterest expenses and a $62 million decline in net funding costs of
carrying portfolio investments. Private equity gains benefited from continued
favorable markets for investment sales and recapitalizations, resulting in nearly
$2 billion of realized gains. The carrying value of the private equity portfolio
declined by $1.3 billion to $6.2 billion as of December 31, 2005. This decline
was primarily the result of sales and recapitalizations of direct investments.
2004 compared with 2003
Private Equity’s operating earnings for the year totaled $602 million compared
with a loss of $290 million in 2003. This improvement reflected a $1.4 billion
increase in total private equity gains. In 2004, markets improved for investment
sales, resulting in $1.4 billion of realized gains on direct investments, compared
with realized gains of $535 million in 2003. Net write-downs on direct
investments were $192 million in 2004 compared with net write-downs of
$404 million in 2003, as valuations continued to stabilize amid positive
market conditions.
The carrying value of the Private Equity portfolio at December 31, 2004,
was $7.5 billion, an increase of $247 million from December 31, 2003. The
increase was primarily the result of the acquisition of ONE Equity Partners as
a result of the Merger. Excluding ONE Equity Partners, the portfolio declined
as a result of sales of investments, which was consistent with management’s
intention to reduce over time the capital committed to private equity. Sales
of third-party fund investments resulted in a decrease in carrying value
of $458 million, to $641 million at December 31, 2004, compared with
$1.1 billion at December 31, 2003.