Two months ago, as it was zeroing in on Bank Handlowy w Warszawie of Poland, Morgan Capital Corp. saw far more than a mere equity investment opportunity.

It also saw ways for its parent, J.P. Morgan & Co., to build commercial and investment banking business.

That link between its investment charter and J.P. Morgan's core strategies is one of the qualities that distinguishes Morgan Capital from other banks' private equity units. With about $1 billion under management it is one of the largest. And of the few such bank affiliates that invest purely in private equity, Morgan Capital is the only one fully integrated in its bank's corporate finance effort.

"Situations where we can deliver other of the bank's products and services to companies that we invest in are obviously highly attractive and leverage up the overall investment to the firm," said Brian Watson, president of Morgan Capital since 1995.

In the Bank Handlowy deal, various parts of J.P. Morgan & Co. contributed a total of approximately $100 million for a 12% stake in the privatization of Poland's biggest bank.

Morgan Capital also brought in two strategic investors that took 12% more: the Zurich Group, the Swiss insurance and financial services company, and the Swedish retail bank Sparbanken Sverige.

When it came time for Bank Handlowy's initial public offering on the Polish stock market June 30, J.P. Morgan Securities Inc. served with Schroders as joint lead manager. Morgan Capital also expects to offer Handlowy other banking products and services.

Mr. Watson's goal for Morgan Capital has been to move away from venture capital, its main activity in the early 1990s, and participate more in merchant banking activities on a global scale.

He explained that the best deals in venture capital are won by private firms focusing on very specific niches within an industry. A bank such as J.P. Morgan can't compete on such a specialized level.

However, it can compete for international deals, an area in which most private firms lack the bank's knowledge and experience.

For example, the bank's presence in Venezuela facilitated Morgan Capital's $30 million investment in Banco Mercantil, Venezuela's second- largest bank.

Some of Morgan Capital's other recent deals, typically investments of $15 million to $20 million, underscore the unit's direction.

One was a $20 million investment in Ionica Group Ltd., a Cambridge, England, telecommunications company. In the case of Ionica, Morgan Capital saw an IPO in the near future, making the deal more attractive to the group.

Ionica went public July 17 on both the London Stock Exchange and Nasdaq at $19.57 per American Depositary Share. J.P. Morgan Securities was a co- manager of the $260 million offering. SBC Warburg was the lead underwriter.

Morgan Capital was also a $15 million investor in Virgin Rail, the Virgin Group's vehicle for participation in the British Rail privatization. In this case, people at Morgan Capital knew the management at Virgin Rail.

"Investing wisely, from Morgan's point of view, is investing in companies or clients we know very well and we trust the management," Mr. Watson said. "And we make the investment strictly along the lines of our investment criteria-we seek a 30% minimum internal rate of return."

Mr. Watson is a veteran of the Morgan bank's move into investment banking. In 1989, when J.P. Morgan established its domestic equity underwriting business, he served as managing director and head of the global equity capital markets group.

Before moving into equities, Mr. Watson was a vice president in the bank's leveraged buyout and mergers and acquisitions department.

One of Morgan Capital's most lucrative transactions was a $200 million investment in Travelers/Aetna Property Casualty Co. Last year, at the time of the Travelers/Aetna merger, Morgan Capital was invited to invest at $15.90 a share, a price that has appreciated roughly 150%. Morgan Capital has sold 20% of the position.

Morgan's offer of banking services in addition to investment capital strengthens its strategy and broadens its appeal to clients, according to an attorney who works on bank private equity deals.

But this attorney, who asked to remain anonymous, warned that if investments are made for the sole purpose of getting banking business, Morgan will risk seeing some of its equity deals go bad.

Some observers also suspect this style of investing can create conflicts of interest.

"By owning companies, providing financial services to those companies, and commenting on those companies for the benefit of other people, they (banks) are obviously in potentially conflicting activities," said one investment banker.

Even as a bank tries to steer clear of conflicts, the mere potential might damage its credibility.

"If an analyst tells me something about a company, and later I learn that his bank has an investment in that company, I won't pay attention to anything he said about it," said a fund manager at an investment bank.

Mr. Watson conceded the possibility of conflict of interest but insisted it is not a problem at Morgan. Outside sources agreed that the company's record is clean.

The only time J.P. Morgan's investment activities took some heat was during the early days of the $1.1 billion Corsair bank investment fund, in which J.P. Morgan invested $100 million.

Corsair, which is managed by Nicholas Paumgarten and is not a part of Morgan Capital, made an investment in Banco Espanol de Credito, or Banesto, of Spain, which nearly collapsed in 1993.

Banesto is recovering and plans to repay ahead of schedule $2.2 billion that was part of a rescue package from the Spanish Deposit Guaranty Fund.

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