A Rising Tide.

Explosive growth in the securities business gives African American investment banks a boost

WHEN THE DALLAS-FORT WORTH INTERNATIONAL AIRPORT recently needed to raise money to finance part of a $2.5 billion expansion program, more than a dozen investment banks tossed their hats into the ring and scrambled for the business. Among the Wall Street high-fliers vying to land the deal were Merrill Lynch & Co., J.P. Morgan Securities Inc. and Goldman Sachs & Co.

In the end, however, it was San Francisco-based Siebert Brandford Shank & Co. L.L.C. (No. 2 on the BE INVESTMENT BANK list) that got clearance for takeoff. In March, SBS underwrote a $335 million bond offering for the airport, winning the largest municipal finance contract ever awarded to a minority firm in the state of Texas.

What did SBS have that its rivals didn't? Simply put, the firm "demonstrated that they have the expertise and capability to meet our expectations," says Vernon Evans, the airport's deputy executive director.

Of particular note, the SBS proposal included a plan to market the transaction through a "road show" on the Internet. Highlights of the road snow included a 10-minute video presentation by the airport staff, an electronic version of a credit presentation booklet for bond insurers and ratings agencies, a conference call with institutional investors and a question and answer session.

Going up against Wall Street's top guns is nothing new for African American investment banks. Yet even a cursory look at how businesses like SBS fared in 1999 reveals some dramatic changes in the industry.

Most black-owned securities firms added significant numbers of branch offices and staff members to their ranks last year. Many took advantage of the continuing bull market to expand their product offerings. And still other investment houses sought to establish or reinvent themselves as national powerhouses rather than regional players.

But the most significant trend to emerge reflects the extent to which technological advances, and especially the Internet, drove business decisions and company operations. Regulatory filings are now handled online and sent to the Securities and Exchange Commission via high-speed modems. Documentation and due diligence reports are zipped back and forth by e-mail while financial-services firms enjoy increasingly powerful computer-driven research and analytical tools. And with the wealth of information readily available over the Internet, investment bankers can bone up on virtually any industry, and find out which companies need to raise money via stock or bond offerings.

DIVERSIFYING PRODUCTS AND SERVICES

Although fixed-income underwriting and sales operations remain important for African American investment dealers, firms are increasingly looking to diversify their product offerings and services. Case in point: Atlanta-based Jackson Securities (No. 10 on the BE INVESTMENT BANK list). A year ago, nearly 100% of the firm's revenues were derived from public finance operations. Now that the business has delved into corporate and structured finance, company executives are striving for a mix of 40% municipal finance revenues, 40% from corporate transactions and 20% from structured finance deals.

The majority of firms report that year-ago revenues and net income were up. "We were profitable for the first time in a long time in 1999, but it's constantly an uphill battle to participate in good deals," says Morgan Bassey, president and CEO of Harvestons Securities Inc. (No. 14 on the BE INVESTMENT BANK list) in Denver. The firm recently co-managed close to $75 million in bond offerings for the Denver Convention Center.

For small and large players alike, a greater challenge is trying to break into the ranks of sole or lead managers on major transactions. It's one thing to co-manage a deal or be part of an underwriting syndicate where an investment bank helps sell a bond issue to individuals or institutions but it takes far more expertise and is much more lucrative for a bank to serve as lead manager or "book-runner." In such a case the firm does everything from due diligence and advisory work to pricing and structuring a bond issue and selling the majority of the securities to be marketed.

BLAZING A TRAIL IN CORPORATE BONDS

In 1999, only two corporate bond transactions were lead-managed by an African American investment bank. In both deals, New York-based Utendahl Capital Partners L.P. (No. 3 on the BE INVESTMENT BANK list) was given the nod. In September, Utendahl sole lead-managed a 10-year, $300 million bond deal by Coca-Cola Enterprises Inc. The firm also acted as a joint book-running lead manager in a $450 million fixed-income offering from AT&T. Moreover, as an equity underwriter, Utendahl had a role as co-manager of Pepsi Bottling Co.'s $2.3 billion initial public offering last March.

"While our underwriting efforts have always been strong, 1999 was a landmark year for us in the capital markets arena," says John Utendahl, chairman and CEO of Utendahl Capital Partners. "We were the first minority firm to lead-manage over $1 billion of corporate debt transactions."

To add more luster to its reputation, Utendahl in 1999 purchased a $1.8 billion asset management division of Atlantic Portfolio Analytics & Management Inc. This now makes Utendahl Capital Management the largest African American-owned fixed-income and convertibles manager in the U.S. with $3.2 billion in assets. As a result of the acquisition, Utendahl opened an office in Orlando adding to its offices in New York and San Diego.

Also last year, the firm launched Urban America L.P., a private real estate fund dedicated to making commercial real estate investments in America's inner city. The fund, which lured such investors as Time Warner President Dick Parsons and American Express President Ken Chenault, recently closed on $100 million of properties.

Aside from Utendahl Capital, Blaylock & Partners L.P. (No. 1 on the BE INVESTMENT BANK list) and the Williams Capital Group (No. 4 on the BE INVESTMENT BANK list) are considered the "Big Three" among New York-based African American-owned investment banks. In 1999, Williams Capital lead-managed $1.7 billion in transactions. Notably, the firm also co-managed AT&T Corp.'s historic $4.5 million bond issue and served as the only minority co-manager on a $5.7 billion Wal-Mart deal.

For its part, Blaylock & Partners L.P. senior-managed $8.59 billion in offerings last year including serving as co-lead on the $8 billion bond issue from AT&T. Blaylock and Williams Capital were also the only minority-owned firms selected to co-manage the blockbuster $1.8 billion initial bond deal from Goldman Sachs & Co. last year.

While African American investment bankers say they are gradually getting a place at the table because of their skills and abilities, some observers attribute growing minority participation in prestigious deals to the Rev. Jesse Jackson's Wall Street Project. For the past few years, Jackson has pushed corporate America to include minority-owned broker-dealers in high-profile stock and bond offerings.

Corporate finance deals generate much more lucrative fees than do other types of business. Underwriters are charging companies issuing secondary offerings fees of 3% to 5%. For investment-grade bonds, companies pay an average of 1.5% to 2%.

Firms like Utendahl Capital, Blaylock & Partners and Williams Capital--which have made diversification their cornerstone--can count on asset management fees to bolster profits during times when underwriting volume is slow or trading and sales business is down. These firms will continue their diversification efforts, aided by the dismantling of the Glass-Steagall Act (see "Total Return," this issue).

MAKING MONEY IN MUNIS

While Utendahl Capital has been a trailblazer among minority-owned firms in the corporate bond and money management arenas, Siebert Brandford Shank is clearly setting the pace in the municipal bond world. In 1999, SBS senior-managed $2.5 billion in municipal offerings, making the firm a heavy-hitter among black- and majority-owned financial institutions.

Among the highlights of the firm's lead-managed deals last year was a $25 million offering for Lubbock, Texas. The $67.5 million new money and refunding issue provided tax relief and significantly reduced borrowing costs for the Chicago Park District, and a $193 million bond deal for the City of Houston.

Already this year, SBS has been appointed financial advisor for the Chicago Housing Authority's $1.5 billion public housing plan. The city plans to raise $600 million through a series of two- or three-bond deals to tear down then rebuild dilapidated buildings.

"As financial advisor, we'll be helping the Authority to select underwriters, deal with rating agencies, and negotiate with HUD. Essentially, we'll help them assemble their finance team to begin the transformation of public housing in Chicago," says Adrienne Archia, managing director and head of the SBS Chicago office.

Plum advisory assignments complement the firm's underwriting strength. In the first quarter of 2000, SBS lead-managed two transactions valued at $357 million.

The firm's creative ideas, use of technology, and concentration on a few select areas--such as redevelopment and transportation--are reasons for SBS's success. To prosper in the new millennium, SBS has also adopted a regional approach to covering the country. In 1999, the firm reestablished its Los Angeles branch, opened offices in Washington, D.C., and Miami and doubled the size of its Chicago office.

MANAGING UNPRECEDENTED GROWTH

Rapid growth is also taking place at other African American-owned brokerages. Last May at Jackson Securities, founder Maynard Jackson turned over the CEO and president reins to Reuben R. McDaniel III, an ex-Bear Stearns executive who most recently served as managing director of capital markets with Llama Co. in Arkansas. Jackson retains the chairman's post and is now responsible for business development and strategic growth, while McDaniel oversees the firm's day-to-day operations.

One of McDaniel's early goals was to make Jackson Securities a national firm instead of a primarily Southeast entity. Already, the new CEO has hit the ground running. In the year since McDaniel's arrival, Jackson Securities added a corporate finance division; opened offices in Houston, San Francisco, San Diego, Los Angeles and Chicago; and beefed up its staff from 12 to 26. "Our revenue growth in 2000 will be consistent with this growth in personnel," McDaniel says, adding the firm is already on track to meet its internal targets.

Jackson Securities scored two major coups in 1999. Along with J.P. Morgan, the firm co-senior-managed a $1 billion bond deal for the city of Atlanta General Fund. Additionally, it handled a $131.8 million leveraged lease deal for tire maker Michelin North America, whose company was in need of specialized advisory services to determine the most cost-efficient way to acquire tire-making equipment.

"We analyzed the economics of them buying versus leasing," says McDaniel. "We also examined how any payments would affect Michelin from a tax standpoint."

Like McDaniel and Jackson, officials at Loop Capital Markets (No. 7 on the BE INVESTMENT BANK list) have also been on a hiring binge, trying to staff a slew of new branches. In March, Loop opened its sixth office in Sarasota, Florida, complementing its Chicago headquarters and branches in New York City, Detroit, Oakland, California and Houston.

After nearly three years in business, the firm has established its presence in the capital markets. As a major public finance dealer in the state of Illinois; Loop serves as the stock buyback agent for 12 Fortune 500 companies and has 15 initial public offerings under its belt since launching its equity underwriting business last May.

Chairman and CEO James Reynolds Jr. says 80% of the businesses his company has taken public are hi-tech firms. As a result, Loop's internal research focuses on the telecommunications and wireless arenas. Reynolds is also expanding Loop's research effort by bringing on an Internet analyst.

"Chicago is positioning itself to be the Silicon Valley of the Midwest," Reynolds proclaims, pointing to the rapidly growing number of hi-tech startups in the region. When these companies want to raise money, they often turn to New York-based investment banks. "We want to step in and handle that business," Reynolds says.

Moving forward, technology and an increasing reliance on the Internet are expected to play huge roles in the lives of African American investment bankers. But just because the hi-tech revolution presents new opportunities, that doesn't mean traditional areas such as municipal underwriting will be disappearing from the landscape.

2000 TOP 15 INVESTMENT BANKS SUMMARY

BLACK-OWNED INVESTMENT BANKS          1998          1999

NUMBER OF EMPLOYEES                    392           473

TOTAL ISSUES                      $144.810      $257.157
(In Billions)

SENIOR-MANAGED ISSUES          $10,668.850   $18,028.635
(In Millions)

CO-MANAGED ISSUES                 $134.140      $239.428
(In Billions)

BLACK-OWNED INVESTMENT BANKS   % CHANGE

NUMBER OF EMPLOYEES             20.66%

TOTAL ISSUES                    77.58%
(In Billions)

SENIOR-MANAGED ISSUES           68.98%
(In Millions)

CO-MANAGED ISSUES               78.49%
(In Billions)

Prepared by B.E. Research. Reviewed by Mitchell & Titus, L.L.P.

B.E. INVESTMENT BANKS

THIS   LAST
YEAR   YEAR   COMPANY                           LOCATION

 1       7    BLAYLOCK & PARTNERS L.P.          New York,
                                                New York

 2       1    SIEBERT BRANDFORD                 San Francisco,
              SHANK & CO. L.L.C.                California

 3       2    UTENDAHL CAPITAL PARTNERS L.P.    New York,
                                                New York

 4       3    THE WILLIAMS CAPITAL GROUP L.P.   New York,
                                                New York

 5       4    RICE FINANCIAL PRODUCTS CO.       New York,
                                                New York

 6       8    M.R. BEAL & CO.                   New York,
                                                New York

 7      14    LOOP CAPITAL MARKETS L.L.C.       Chicago,
                                                Illinois

 8       5    SBK BROOKS INVESTMENT CORP.       Cleveland,
                                                Ohio

 9      13    THE CHAPMAN CO.                   Baltimore,
                                                Maryland

10       6    JACKSON SECURITIES INC.           Atlanta,
                                                Georgia

11      11    POWELL CAPITAL MARKETS INC.       Roseland,
                                                New Jersey

12      10    WALTON JOHNSON & COMPANY          Dallas,
                                                Texas

13      --    GILCHRIST & COMPANY INC.          Birmingham,
                                                Alabama

14      15    HARVESTONS SECURITIES INC.        Denver,
                                                Colorado

15       9    PRYOR, COUNTS & CO. INC.          Philadelphia,
                                                Pennsylvania

                                                           YEAR
COMPANY                           CHIEF EXECUTIVE         STARTED

BLAYLOCK & PARTNERS L.P.          Ronald E. Blaylock       1993

SIEBERT BRANDFORD                 Suzanne F. Shank         1996
SHANK & CO. L.L.C.

UTENDAHL CAPITAL PARTNERS L.P.    John O. Utendahl         1992

THE WILLIAMS CAPITAL GROUP L.P.   Christopher J.           1994
                                  Williams

RICE FINANCIAL PRODUCTS CO.       J. Donald Rice Jr.       1994

M.R. BEAL & CO.                   Bernard B. Beal          1988

LOOP CAPITAL MARKETS L.L.C.       James Reynolds Jr.       1997

SBK BROOKS INVESTMENT CORP.       Eric L. Small            1993

THE CHAPMAN CO.                   Nathan A. Chapman Jr.    1986

JACKSON SECURITIES INC.           Maynard H. Jackson       1990

POWELL CAPITAL MARKETS INC.       Arthur F. Powell         1990

WALTON JOHNSON & COMPANY          Jesse C. McRae III       1990

GILCHRIST & COMPANY INC.          Harold Gilchrist         1983

HARVESTONS SECURITIES INC.        Morgan Bassey            1993

PRYOR, COUNTS & CO. INC.          Malcolmn D. Pryor        1981

                                  SENIOR-MANAGED   CO-MANAGED
                                    ISSUES(*)       ISSUES(*)
                                    (Millions       (Billions
COMPANY                            of dollars)     of dollars)

BLAYLOCK & PARTNERS L.P.             8,587.000        35.589

SIEBERT BRANDFORD                    2,500.000        18.400
SHANK & CO. L.L.C.

UTENDAHL CAPITAL PARTNERS L.P.       1,920.000        49.427

THE WILLIAMS CAPITAL GROUP L.P.      1,715.000        41.999

RICE FINANCIAL PRODUCTS CO.            774.000        20.163

M.R. BEAL & CO.                        565.000        17.500

LOOP CAPITAL MARKETS L.L.C.            464.660        17.824

SBK BROOKS INVESTMENT CORP.            443.549         1.549

THE CHAPMAN CO.                        277.000         7.500

JACKSON SECURITIES INC.                237.375        10.963

POWELL CAPITAL MARKETS INC.            204.977         0.846

WALTON JOHNSON & COMPANY               143.000         3.868

GILCHRIST & COMPANY INC.               110.000         0.950

HARVESTONS SECURITIES INC.              75.800         1.730

PRYOR, COUNTS & CO. INC.                11.274        11.120

(*) This is for all issues including, but not limited to, municipal, agency, corporate and mortgage-backed securities for the year ending December 31, 1999.

Prepared by B.E. Research. Reviewed by Mitchell & Titus, L.L.P.