A Rough Patch For Chase's Vc Unit Rocks The Parent's Earnings

The bank's private equity shop isn't a cash cow any more

The head of Chase Manhattan Bank's private equity unit, Jeffrey C. Walker, seems remarkably calm considering what happened. On Oct. 18, the bank missed analysts' estimates of its third-quarter earnings by a huge 25 cents a share, in part because of a $25 million net loss in the portfolio run by Walker's shop, Chase Capital Partners. "The market doesn't always rise," senior managing director Walker says. "You can't always get rich in two years. This is a good thing."

To many shareholders, the glory days of late 1999 were much better. In the final quarter that year his unit, which funds growing companies in exchange for equity in the firms, recorded a $1.3 billion gain and contributed about a quarter of Chase's overall profits for the year. The turnabout sent Chase's stock reeling: At one point on Oct. 18 it was down 18%.

Top Chase brass, too, are worried about the impact the wild swings in earnings at Chase Capital Partners are having on the bank as a whole. "That's an issue we have to deal with one way or another," Vice-Chairman Marc Shapiro told analysts. So far, however, the key to harnessing the unit's profitability, without suffering from its volatility, has proven elusive. "We've changed opinions [about this] at least every month as the market moved," Shapiro says. The bank has considered, among other things, spinning the unit off or establishing a tracking stock. Chase will have an answer by yearend, he promises.

If you take Walker's long-term perspective, the latest quarter looks like a mere blip. In the past 16 years, Chase Capital Partners has netted an average 40% return a year on its investments. And despite such luxurious touches as Persian rugs, saltwater fish tanks, and a feng sui consultant at its offices on New York's Sixth Ave., Capital Partners' cost of doing business is far lower than that of most other Chase units.

The latest quarter's loss is mainly due to investments in telecom companies Telecorp PCS Inc. and Triton PCS Holdings Inc. Shares of both are more than 60% off their 52-week highs. Walker says he thinks the two are worth more and points out that Chase's stake in them is still worth five times the bank's initial investment, despite the drop. His advice is to have patience. "Rather than look at quarterly swings in profits, I look at how much I can make from my investment in a four- to five-year period." Looking for the "next new thing," he's now investing in genomic science and manufacturers of the tools that genomic researchers need.

NOT ALONE. Chase is not the only bank in the risky business of private equity--it's just the biggest. And it reaped the biggest percentage of profits from private equity in 1999, followed by J.P. Morgan. Not far behind were Wells Fargo, First Union, and FleetBoston.

And, to be fair, Chase Capital Partners isn't solely to blame for the bank's earnings tumble. Trading and corporate finance fees fell from the second quarter, while expenses grew. Says ING Barings analyst Andrew B. Collins: "They've created volatility that they haven't been able to offset with other businesses." The combination of Chase and J.P. Morgan, announced Sept. 13, might take some of the heat off. Though J.P. Morgan's private equity shop will add $4 billion to Chase Capital Partner's $11 billion in holdings, the combined unit will be a smaller part of the merged bank than Capital Partners was of Chase.

All the same, the disappointing quarter couldn't have come at a worse time for Chase, which has watched its stock slide since it announced the Morgan deal. But Chase executives would be shortsighted to toss out the Capital Partners unit. After all, Chase's shareholders may already have learned to live with greater volatility: Two days after the earnings surprise, the shares had regained their losses and climbed even higher.

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