Big Banks Pumping Up Equity Investments

By Kraus, James R. | American Banker, March 15, 1995 | Go to article overview

Big Banks Pumping Up Equity Investments


Kraus, James R., American Banker


Back in 1987, Chemical Banking Corp. pumped $2.5 million into an equity stake in Office Depot Inc. of Delray Beach, Fla. When Delray went public a year later, Chemical found itself sitting on top of $31 million in stock.

In 1989, Chase Manhattan Corp., together with a Columbus, Ohio, steelmaker called Worthington Industries Inc. and Ford Motor Co., spent $5 million to acquire Rouge Steel Co., a struggling steelmaker in Dearborn, Mich.

When Rouge went public last year, the bank and its two partners got back a total of $352 million for their investment.

In 1988, Bank of Boston Corp. invested $1.3 million in In Focus Systems Inc., a maker of graphic presentation systems based in Wilsonville, Ore.

After In Focus went public in 1990, the bank sold off its stock, cashing in on $7.3 million in earnings.

Hoping to back more such big-time winners, major U.S. banks are revving up their equity investments.

Executives in charge of such programs say they are boosting staff, adding capital, and increasing investments. They are also looking further afield to stakes in companies outside the United States.

Bankers Trust New York Corp., for example, is adding $500 million to its program, on top of some $400 million in existing investments and several hundred million dollars more in passive investments through equity funds.

Executives at the bank say the extra capital will be used to expand investments abroad. Bankers Trust is setting up a team that will specialize in Latin American investments and is increasing equity investments staff in New York, Los Angeles, London, and Asia .

"We think we can dramatically leverage the value of our portfolio," says Douglas Brent, managing director for the bank's Global Strategic Investment Group.

Other banks are moving in the same direction.

J.P. Morgan & Co., which has $1.5 billion in private equity holdings and runs three other funds in which outside investors participate, is also looking overseas to Latin America, Europe, and Southeast Asian countries like the Philippines and China.

"This is not a good time to buy U.S. private equity, so a lot of new investment is going overseas," says David M. Cromwell, managing director at J.P. Morgan Capital Corp, Morgan's venture capital investment unit.

"Stock markets in the U.S. are at record highs, and the best time to buy is when capital markets are dead," he observed.

The Morgan executive also stressed that economic growth is as important as low prices and competition for investments in arriving at a decision whether or not to invest.

"Some of the best opportunities are in economies that are growing rapidly," he said.

"There's nothing like the speed of growth in Southeast Asia or, until recently, in Latin America."

Pretax earnings from equity investments at Morgan rose to $600 million last year, up from $225 million in 1993, and accounted for more than 25% of the bank's total pretax earnings. Mr. Cromwell said the goal is to derive around 15% of pretax earnings from equity sales, but emphasized that such revenues are highly volatile, depending on where the stock market is going.

Meanwhile, Chase last year more than doubled its annual private equity investments to $110 million from $50 million a year earlier, and now has more than $500 million in direct equity investments. The bank earned about $215 million in pretax revenues from equity investments last year. A year earlier, it earned $259 million.

"We've stepped up our activities," says Maria Willets, executive vice president and head of Chase Global Specialized Finance. "The total amount is going up."

Adds Jeffrey C. Walker, managing general partner at Chemical Venture Partners, the equity investment arm of Chemical Banking Corp. that has more than $2 billion in investments: "We invested about $200 million last year, and we plan to pump more in."

Bank of Boston, the first bank to open a small business investment company back in 1959, committed a similar amount to 25 new investments in 1994. …

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