Want to know which recent member of the New Economy Club may be fretting at the weakness in tech stocks? It's
, the New York-based financial services giant that has transformed itself into a New New Bank through a massive allocation of capital to its private equity unit,
Chase Capital Partners
Any declines or increases in the stock market can have a disproportionately large impact on Chase's bottom line, because market moves in Chase Capital's public companies are factored into profits. As a result, nasty drops in many of Chase Capital's tech-stock holdings could keep first-quarter earnings as much as 15% below expectations, according to a banks analyst and data from Chase Capital.
That possibility stands in stark contrast to last year, when Chase Capital's heavy bias toward New Economy companies made it hugely profitable. Chase Capital's gains totaled $2.52 billion in 1999, up 161% from 1998's $967 million. And the unit supplied nearly a quarter of the bank's 1999 operating earnings of $5.69 billion. Enthusiasm generated by the VC arm has helped drive Chase shares up 17% this year.
So what's going on now? Well, 13 of the 18 Chase Capital-affiliated companies that held IPOs last year -- the stocks partly responsible for the bank's
blowout fourth quarter -- have seen their shares decline in the first quarter.
Chase declined to comment for this story, and the bank's public relations department refused to pass numbers used in this article to Chase Capital to be checked for accuracy. (Chase Capital Partners is an investor in
, the publisher of this Web site.)
Because, unlike more conservative banks, Chase factors Chase Capital companies' market gains (or losses) into its profit calculations, these big moves down likely will restrain earnings for the year's first quarter. Chase's first-quarter profits are expected to come in at $1.53 per share, according to analysts surveyed by
First Call/Thomson Financial
In fact, the market gain on Chase Capital's 68 public companies has dropped by an estimated $200 million since March 17, reducing the year-to-date market gain to around $50 million, according to Mike Mayo, banks analyst at
Credit Suisse First Boston
. (CSFB hasn't done any underwriting and rates Chase a sell.) That $200 million drop amounts to about 15% of the roughly $1.3 billion in operating earnings expected this quarter, or about 23 cents per share.
On Wednesday, concern about lower-than-expected gains for Chase Capital helped push Chase stock down 3 3/4, or 4%, to 90 1/2, compared with a 1.6% drop in the
KBW Banks Index
Swinging for the Fences?
For the first quarter through March 28, nearly half of the 18 IPOs done in 1999 by companies in the Chase Capital stable were down 20% or more (see table, above).
was off 51%, for instance. VitaminShoppe.com and
, an electrical supplies distributor, appear to be trading at a level even below the pre-IPO price that Chase got into these companies, according to data from Chase Capital's
"You don't pay a high multiple for that," says Jonathan Iseson, manager of Long Island, N.Y.-based
, referring to the big drops. (Bluewater has no position in Chase shares.) Chase trades at 14 times analysts' 2000 earnings forecast, vs. 12 times for the KBW Banks Index.
If it's assumed that Chase didn't sell any shares in these companies during the period in question (though it may well have), then the overall mark-to-market gain for the 1999 IPOs can be estimated at $190 million for the first quarter. Sounds OK, until you realize that those gains and more came from just two companies:
, a pair of wireless telecommunications companies that showed estimated market gains to Chase's portfolio for the period of $230 million and $225 million, respectively.
Private-equity investing often relies on the theory that a couple of home runs make up for all the strikeouts. But when it comes to 1999 issues, Chase is perhaps relying on too few home runs, and it's not clear how long those will remain as a positive on the scoreboard. The reliance on Triton and TeleCorp "is a sign that there might be a time when they don't have enough big wins," says CSFB's Mayo.
And Triton and TeleCorp themselves easily could be headed for steep falls, because they are trading at an improbable 34 times and 46 times 1999
Cash on the Barrel
Still, some analysts are advising investors not to worry about the effect of drooping tech stocks on Chase. David Berry, head of research at
Keefe Bruyette & Woods
, a New York-based bank stock brokerage, says that it's misleading to concentrate on the mark-to-market part of Chase's gains. For one, mark-to-market gains are only one source of earnings at Chase Capital. The bank may have sold shares (and thus pocketed cash) worth up to $300 million in this quarter, says Berry. (Keefe hasn't done any underwriting for Chase, and Berry rates Chase shares outperform.)
What's more, the vast majority of Chase Capital's investments in public companies are now worth many, many times the value of the original investment, Berry points out.