Wall Street, already treading carefully around tech investors, is not willing to publicly forgive its private equity arms for making a bad situation worse.
Last week, Chase Manhattan Corp. issued a disappointing earnings report, dumping much of the blame on its $10.8 billion Chase Capital Partners affiliate. Earnings in the third quarter totaled $905 million, compared to $1.19 billion during the same period in 1999. Net income in the third quarter hit $884 million to reach $3.34 billion year-to-date. During the first nine months of 1999, Chase’s net income hit $3.71 billion.
Although Chase Capital Partners was singled out for blame by the bank – with Chase going so far as to offer investors an alternative earnings report excluding Chase Capital Partners – analysts were more forgiving.
“We view fluctuations in public market values as a poor indicator for the future performance of Chase Capital Partners,” said David Berry, an analyst with Keefe, Bruyette & Woods. “We are more impressed by the strong cash liquidations in the quarter, and we continue to view Chase Capital Partners as a significant source of value creation for Chase Manhattan.”
The bank’s private equity portfolio amounted to a loss of $25 million in the third quarter, compared with gains of $298 million in the second quarter and $377 million in the year-ago period. Although Chase cashed in on the sale of both public and private securities held in its portfolio, amounting to a gain of $538 million, the gains were more than offset by declines in the carrying value of the publicly-traded investments in its portfolio.
Chase, like most players navigating through the volatile public markets, was hardest hit in the telecommunications and technology sectors.
The firm has largely defined itself in the latter area, bolstered by its 1999 acquisition of West Coast boutique investment bank Hambrecht & Quist. Approximately 22% of its capital sits in the media and telecommunications sector, while an additional 18% is invested in the technology and information technology sectors.
The firm holds 413 private companies in these sectors, at a cost of $2.25 billion. The firm also holds stakes in 120 public companies in the media, telecommunications and technology sectors, acquired at a cost of $394 million. As of Sept. 30, Chase’s holdings in these public companies were quoted at a value of $2.06 billion.
Tech Busts All Over
Although Chase’s top ten public holdings showed a net gain over the quarter, with a quoted public value of $1.79 billion, versus a cost of $225 million, the gains have been offset by some of Chase’s smaller holdings – technology stocks pummeled by investors in recent months.
Latin American online network Starmedia Network Inc., Chase’s tenth largest holding at 11.1 million shares, hit an all-time low just a day before Chase issued its earnings release, $4.34 a share Oct. 18, from its peak at $61 a share Feb. 11. The company went public in May of last year at $15 a share.
Other major losers in the portfolio include names like American Tower, PeoplePC Inc., TheStreet.com and VitaminShoppe.com – all of which have suffered beatings in recent months.
Since the end of the second quarter, the value of Chase Capital Partners’ investment portfolio is down more than $300 million. At the end of the third quarter, Chase’s investments in public securities, private companies and private funds was valued at $10.52 billion, down from $10.90 billion in the previous quarter.
Still, when the markets recover, analysts predict Chase Capital Partners’ portfolio will follow.
“In total, we don’t think it unreasonable for Chase earnings to climb up to similar levels that we saw in the second quarter of this year – provided we don’t see another 30% drop in Chase Capital Partners’ venture capital portfolio,” said James Mitchell, an analyst with Putnam, Lovell & Thornton, in a research report. “And if the markets stabilize and unrealized losses in venture capital are limited, the results could be even better.”
Chase Capital is slated to invest $3.5 billion this year. By the end of the second quarter, the firm had announced $2.1 billion in equity commitments to 163 companies.
Although Chase is still “completing several deals a week,” one insider said, deal flow is expected to slow through the second half of this year, but poor performance earlier this year is not to blame. Chase is in the midst of closing a $5 billion global private equity fund and resources are stretched thin, the source said. Just three weeks ago, the firm announced it was restructuring its portfolio of limited partnership interests and would sell up to $2 billion of commitments to free up capital for investments. The firm expects to liquidate about $1 billion of those interests by early next year.