Silver Lining For JPMorgan Partners Loss?

JPMorgan Partners (JPMP) reported a loss of $255 million for the first quarter of this year, a slight rebound from the $385 million loss the group reported for the fourth quarter of 2001. Despite the group?s ongoing troubles ? this is the $8.55 billion private equity portfolio?s seventh quarterly loss ? there are hints of a solid rebound in the months to come.

Even before JPMP made its announcement, Susan Roth, an analyst with New York?s Credit Suisse First Boston, forecasted $500 million to $700 million of net revenue for JPMP in 2002 ? factoring in a $250 million net loss for the first quarter.

The first quarter net loss was driven primarily by a $240 million mark-to-market loss in the technology and telecom sectors of the portfolio. JPMP took a $200 million write-down in the value of Triton PCS alone, a Pennsylvania-based cellular network operator which JPMP backed with approximately $20 million in venture capital before its $180 million IPO in October 1999. Before the offering, JP Morgan owned 17.2% of the company?s equity, or 469,510.62 shares. Offered at $18.00 a share, the stock is now trading around $4.50 a share.

Going forward, however, mark-to-market losses should be mitigated by realized gains on ownership sales and IPOs in the portfolio, Roth predicts, and by a gradual move away from the technology and telecom sectors. Just a year ago, technology and telecom accounted for 35% of the group?s holdings, but by the end of the first quarter, technology and telecom accounted for just 24% of its holdings. About half of those investments date back to 1999 or 2000, and already have been marked down by 50% of their original cost.

Deal flow in the technology and telecom sectors has dried considerably, says JPM CFO Dina Dublon, and the group?s overall investment pace slowed to $100 million in the first quarter, with increased interest in the life sciences sector. Last year, JPMP put $900 million to work in the private equity arena.

Still, liquidity is coming back into the portfolio, a factor that could drive up its value as the year unfolds as the IPO climate warms and M&A activity heats up. In the first quarter alone there were four such events: PayPal Inc.?s $70 million IPO in February, and secondary offerings for Fisher Scientific, Packaging Corp. of America, and United Auto. And, just two weeks ago, JetBlue Airways floated a $158 million IPO. JPMP had a pre-offering stake of 13% in the company.

Despite signs of improvement, blue skies are not all certain for JPMP. It has been in the market with an $8 billion global private equity fund for over a year and has closed on just $1.5 billion ? up to one-third of that capital coming from individual investors in the bank?s private banking group. And, seven consecutive quarters of losses have raised red lights among the bank?s senior executives.

After the bank posted dismal earnings for 2001, CEO Bill Harrison sent an internal memo to employees that said too much capital had been committed to JPMP. Harrison did commend the group for satisfactory performance over the last 17 years?but if JPMP?s performance remains on its current downward trajectory, Harrison may have only his memory to praise.

Contact Carolina Braunschweig at:

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