After taking a beating in the public markets for the fifth consecutive quarter, JP Morgan Partners will begin a biannual strategy review later this month to reevaluate its position and stem any further losses to parent JP Morgan Chase & Co.’s bottom line.
In a quarterly earnings call with investors last week, the New York-based bank reported a $103 million loss in its private equity portfolio for the third quarter. After factoring in JPMP’s loss of $0.08 per share, the bank reported quarterly operating earnings per share of $0.51.
Though last quarter’s figures are only a fraction of the $826 million loss reported in the second quarter by JP Morgan Partners, the bloodletting is likely to continue as long as the public markets stumble.
Indeed, much of the third quarter loss was attributed to mark-to-market losses taken on public positions in technology and telecommunications companies. The $306 million in unrealized losses was partially offset by net realized gains of $203 million and a $60 million Nasdaq-based hedge put into place in August to help offset the market’s volatility.
“Last quarter we were particularly focused on the technology and telecommunications portfolio. The tech world had changed; the capacity of companies to raised capital was sharply diminished,” said Marc Shapiro, head of finance, risk and administration for JP Morgan Chase & Co.
Based on the new assumption that markets had so soured toward these sectors that its portfolio companies would not have the capacity to raise further rounds of private capital, they were revalued at a loss, he added.
The firm made write-downs on 30% of the technology and telecommunications deals it had made over the last three years.
Still, said JP Morgan Chase & Co. CFO Dina Dublon, the portfolio’s more recent investments in the technology and telecommunications sector – those made in the 1999-2000 cycle – lean heavily toward the wireless sector, which may better withstand the negative climate than its older, broadband investments.
Even so, the biannual review, one that Managing General Partner Jeff Walker called a “soup-to-nuts” review, will rake over the portfolio for systematic, long-term risk factors and possibly cast a new strategic forecast for the $25 billion-strong private equity heavyweight.
While the events of Sept. 11, he said, had only a marginal impact on the portfolio – only 3% of the portfolio, or $235 million, is exposed to the travel, leisure, hotel and aerospace industries – the grim economic and political forecast for the months to come will create a challenge for the team as it crosses into uncharted territory.
Matching its historical annual return of 25% since inception is unlikely in the short-term, but if the team is able to hold steady, it too will weather the turbulent times ahead.
Carolina Braunschweig can be contacted at: Carolina.Braunschweig@tfn.com