JP Morgan Chase 2003 Annual Report Download - page 38

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Financial results overview
JPM organ Partners (“ JPM P” ) recognized negative operating
revenue of $190 million and operating losses of $293 million
in 2003. Opportunities to realize value through sales, recapital-
izations and initial public offerings (“ IPOs” ) of investments,
although limited, improved during the year as the M &A and
IPO markets started to recover.
Private equity gains totaled $27 million in 2003, compared with
a loss of $733 million in 2002. JPM P recognized gains of $346
million on direct investments and losses of $319 million on
sales and w ritedow ns of private third-party fund investments.
Realized cash gains on direct investments of $535 million
increased 18% from the previous year. Realized cash gains w ere
recognized across all industries but w ere primarily realized
from the Industrial and Consumer retail and services sectors.
In addition, JPM P recorded unrealized gains of $215 million
JPMorgan Partners
JPMorgan Partners, the global private equity
organization of JPMorgan Chase, provides equity
and mezzanine capital financing to private
companies. It is a diversified investor, investing
in buyouts and in growth equity and venture
opportunities across a variety of industry sectors,
with the objective of creating long-term value for
the Firm and third-party investors.
Selected financial data
Year ended December 31,
(in millions, except ratios
and employees) 2003 2002 Change
Operat ing revenue:
Private equity gains (losses):
Direct investments $346 $(583) $ 929
Private third-party fund investments (319) (150) (169)
Total private equity gains (losses) 27 (733) 760
Net interest income (loss) (264) (302) 38
Fees and other revenue 47 59 (12)
Total operating revenue (190) (976) 786
Operat ing expense:
Compensation expense 135 128 7
Noncompensation expense 140 171 (31)
Total operating expense 275 299 (24)
Operat ing m argin (465) (1,275) 810
Operat ing losses $ (293) $(808) 515
Shareholder value added:
Operating earnings
less preferred dividends $(300) $(815) 515
Less: cost of capital 869 944 (75)
Shareholder value added $(1,169) $(1,759) 590
Average allocated capital $5,789 $6,293 (8)%
Average assets 8,818 9,677 (9)
Full-time equivalent employees 316 357 (11)
Investment pace, portfolio diversification and
capital under management
In 2003, increased emphasis w as placed on leveraged buyouts
and grow th equity opportunities. JPM P’s direct investments for
the Firm’s account in 2003 w ere $773 million, a 19% decline from
the prior year. Approximately 67% of direct investments w ere in
the Industrial, Consumer retail and services, Life sciences and
Healthcare infrastructure sectors.
JPM P reduced the size of the portfolio by 12% , largely the result
of sales of third-party fund investments, w hich declined by
$744 million.
At December 31, 2003, the carrying value of JPM P’s public secu-
rities portfolio w as $643 million, a 24% increase from 2002.
The increase resulted from higher market valuations and from
IPOs of certain portfolio investments, partially offset by ongoing
sales activity.
Business outlook
The Firm continues to regard JPM P as a strategic business that
w ill create value over the long term. JPM P is seeking to sell
selected investments that are not central to its portfolio strategy,
w ith the goal that, over time, JPM P’s private equity portfolio will
represent a low er percentage of the Firm’s common stockholders’
equity.
JPM P’s private equity portfolio and financial performance are
sensitive to the level of M &A, IPO and debt financing activity.
Improved markets in 2004 could provide increased exit opportu-
nities and improved financial performance.
Private equity gains (losses)
Year ended December 31,
(in millions) 2003 2002 Change
Direct investm ent s:
Realized cash gains $535 $452 $ 83
Write-ups/(write-downs/
write-offs) (404) (825) 421
MTM gains (losses)(a) 215 (210) 425
Total direct investments 346 (583) 929
Private t hird-part y fund
investm ent s (319) (150) (169)
Total private equity gains (losses) $27 $(733) 760
(a) Includes mark-to-market gains (losses) and reversals of mark-to-market gains (losses)
due to public securities sales.
from the mark-to-market (“ M TM” ) value of its public portfolio,
primarily in the Healthcare infrastructure, Technology and
Telecommunications sectors.
JPM P’s unrealized and realized gains w ere partially offset by net
w rite-offs (realized losses) and w rite-dow ns (unrealized losses)
on the direct portfolio of $404 million. These w rite-dow ns and
w rite-offs included $239 million from the Technology and
Telecommunications sectors.
M anagement’s discussion and analysis
J.P. M organ Chase & Co.
36 J.P. Morgan Chase & Co. / 2003 Annual Report