A weak third quarter has Chase Manhattan Corp. wondering whether to split off its private equity business with a tracking stock.

The alternative is to keep trying to persuade investors to tolerate the volatility that the unit imposes on quarterly results. Chase raised the issue at the beginning of the year, but executives said they are still debating.

“We are still withholding judgment,” said Marc J. Shapiro, vice chairman for finance and risk management, during a conference call with investors and analysts Wednesday. “We will try to come to a conclusion by yearend.”

Chase Capital Partners posted spectacular gains before spring’s technology stock rout, helping to substantially boost the banking company’s profits and expectations for its future prospects. But the hit to technology, telecommunications, and media stocks since then has dampened those gains, and investors have become less enthusiastic.

Chase Capital Partners posted third-quarter losses of $25 million, after profits of $298 million in the second quarter, dragging down the banking company’s earnings per share to 68 cents. Had the results of the unit been excluded, Chase’s earnings per share would have been 77 cents.

To try to differentiate the performance of the banking company from the private equity unit, Chase has begun to report the financial results of Chase Capital Partners’ separately. In addition, it has provided details of the publicly traded portion of its investment portfolio on its Web site.

The idea — to assist analysts and investors with evaluating the unit’s impact on the company — does not appear to be working. Most Wall Street analysts were caught off guard, having failed to calculate the decline in the value of the public portfolio during the quarter into their overall estimates for Chase earnings. The consensus estimate for the third quarter was 93 cents.

“I think Chase is obviously frustrated with the way the market looks at Chase Capital Partners,” said Lawrence Cohn, an analyst at Ryan Beck & Co. “The bank pitched the idea that the market should look at it differently,” but the company “made absolutely no progress at getting people to adopt that view,” he said

While the loss at Chase Capital Partners set off alarms for investors, in the context of the whole venture capital community, the results were certainly no surprise.

The average second-quarter internal rates of return for venture capital firms was 3.9%, dipping below 10% for the first time since the end of 1998, according to data from Venture Economics, a Thomson Financial company. Third-quarter figures were not available at press time.

Jesse Reyes, vice president of global product management at Venture Economics, wrote in a research note that the “downward trend in short-term performance over the last six months will probably continue through the end of 2000 as the effects of public market volatility makes its way through to private markets.”

Analysts said that, despite its well-orchestrated publicity campaign this year, Chase may not have done a good enough job educating investors about the business of private equity investing.

Chase executives were not available for comment, a spokeswoman said.

David Berry, director of research at Keefe, Bruyette & Woods Inc., said investors who know Chase Capital Partners’ track record, personnel, and network for sourcing deals get very excited about it. Separating out venture earnings clarifies how each part of the business is operating, but the unit has features that do not appeal to investors who are focused on quarterly earnings, he said.

Mr. Reyes said that independent private equity funds tend to do better than those that operate as subsidiaries of larger companies because they are freer to make decisions without worrying about quarterly returns. “Your parent company can pull the plug if they don’t like what you are doing, and if you are independent, you can make longer-term decisions.”

Mr. Shapiro also said, without elaborating, that the company had examined “other permutations” for its private equity unit.

The division has already strayed from having Chase as its sole limited partner by inviting outside investors to join a new $5 billion fund.

With more than $20 billion under management, Chase Capital Partners invests in such sectors as telecommunications, technology, and information services.

Another potential complication is Chase’s pending acquisition of J.P. Morgan & Co. Chase Capital Partners is to absorb the smaller Morgan Capital Corp. Jeffrey C. Walker, managing general partner of Chase’s venture unit, will lead the combined team, and sources close to the situation expect John A. (Tony) Mayer Jr., Morgan Capital’s chief executive officer, to leave the firm.

Ron Mandle, a senior research analyst at Sanford C. Bernstein, said that within a much bigger corporation, Chase Capital Partners will be a much smaller piece of the pie. “In the near term they are going to keep” the unit, he said.


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