Changing of the Guard: B.E. investment banks overview.

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Nathan Chapman Jr. can't forget the butterflies that took wing in his stomach the night before his firm made its debut as the nation's first publicly traded African American investment bank. "I was so excited, I couldn't sleep," Chapman recalls. So around 3 a.m. he sprang out of bed, quickly dressed, and headed for the Baltimore offices of the Chapman Co. (No. 12 on the BE INVESTMENT BANKS list).

As it turns out, Chapman wasn't the only restless one--so was his second-in-command, COO Earl Bravo. Peering through the window of his downtown residence, Bravo could see the lights shining at the company headquarters. He knew it could only be his boss.

Soon, the two men were clamoring about the office in the wee hours of the morning. They made a checklist of everything that had to be done and her died last-minute details like inspecting legal paperwork and fine-tuning written instructions to the firm's stockbrokers.

By the time the market opened at 9:30 a.m., a core group of employees had joined Chapman and Bravo around a Quotron machine. Ten minutes later, the first 100 shares of Chapman Holdings Inc. changed hands. The stock moved up 12.5 cents, and a collective cheer thundered through the office.

On that day, Feb. 27, 1998, 40 year-old Nathan Chapman realized a long-held dream: he was now chief executive of a public, black-owned brokerage firm--a feat praised by industry newcomers and veterans alike. "That was the stud move of the century for African Americans on Wall Street," says Harold E. Doley Jr., who has been in the business for 30 years. He marvels that Chapman Holdings had revenues of just over $3 million, yet was able to command a healthy $8 per share stock price--making the stock affordable for the average investor and giving the firm a market capitalization of $30 million. "It's a phenomenal achievement," adds Doley, chairman of Doley in New Orleans (No. 14 on the BE INVESTMENT BANKS list).

Though Chapman Holdings' status as a public entity is unique, in many ways the firm symbolizes a changing of the guard among African American investment banks as they approach the new millennium. For more than a decade, firms such as Grigsby Brandford & Co., WR Lazard & Co. and Pryor McClendon Counts & Co. (No. 13 on the BE INVESTMENT BANKS list) topped the list of black-owned investment firms. Now, with those firms either dismantled or in serious decline, a powerful new group of players is emerging. In truth, though, the current movers and shakers aren't really new to the industry. Each boasts at least a decade of experience in the investment business. And all have toiled at Wall Street's top-tier firms.

While the current crop of black investment professionals often adopt drastically different approaches to achieving success, they are all united by several factors. First, they are employing a "by any means necessary" strategy to securing the capital they'll need. For Chapman, an initial public offering did the trick. For others, building strategic alliances with larger, majority-owned firms has worked. Another group has opted to merge with one-time competitors to remain viable.

This new breed of investment banker is now benefiting from the inroads carved by black pioneers in the industry. Arguably, they are poised to learn from their forerunners' successes, as well as their mistakes.

1998 TOP 15 INVESTMENT BANKS SUMMARY

BLACK-OWNED                                       PERCENT
INVESTMENT BANKS            1996         1997     CHANGE

NUMBER OF EMPLOYEES         254(*)          311    22.44%

TOTAL ISSUES               $57.923     $122.539   115.55%
(In Billions)

SENIOR-MANAGED ISSUES   $6,881.485   $6,114.159   -11.15%
(In Millions)

CO-MANAGED ISSUES          $51,042     $116.425   128.10%
(In Billions)

Today's investment bankers realize that they have to specialize in a board array of financial services. That means doing everything from trading stocks and bonds to underwriting corporate equity offerings to asset management. That's in stark contrast to their predecessors--most of whom focused primarily, if not exclusively, on public finance.

"We have definitely seen an ascension of what I call the `New Jack" young black firms," says Tony Chapelle, publisher of Securities Pro, a New York-based newsletter that tracks African Americans in the investment industry. Besides Chapman & Co., that New Jack bad of African American broker-dealers includes the Utendahl Capital Partners L.P. (No. 1 on the BE INVESTMENT BANKS list), Williams Capital Group (No. 3 on the BE INVESTMENT BANKS list), and Blaylock & Partners L.P. (No. 8 on the BE INVESTMENT BANKS list).

Despite all the changes, the repositioning of black-owned firms in the securities industry does not spell the death-knell of traditional lines business such as municipal finance. Rather, on the cusp of the 21st century, black investment banks are aggressively expanding their products and services, and becoming more creative to survive in a fiercely competitive environment.

THE STATE OF THE INDUSTRY

According to the U.S. Equal Employment Opportunity Commission, the 17,462 African Americans who work in the securities industry amount to 8.4% of the 209,048 people in the business. While their presence on Wall Street remains paltry, it is increasing somewhat, according to Ernest Green, chairman of the National Association of Securities Professionals (NASP), a black trade organization.

Changes of another sort are also slowly taking place. This year, the New York Stock Exchange closed to observe Martin Luther King Jr.'s birthday for the first time. That's marked departure from the brief moment of silence the Big Board had used to commemorate the date in previous years.

The credit for much of the progress belongs to groups like NASP, as well as the efforts of the Rev. Jesse Jackson and his Rainbow/Push Coalition. In March, for instance, Jackson hosted a three-day conference designed to promote minorities and women on Wall Street. The high-profile gathering, attended by President Clinton, Federal REserve Chairman Alan Greenspan and numerous Fortune 500 CEOs, turned the spotlight on the lack of diversity in the investment banking business.

The initiative was part of a larger push by Jackson to get corporate America to increase economic ties with blacks via improved hiring practices, granting spots on corporate boards and making investments in the inner cities. Today's black investment banking pros, however, will tell you that a handout is the last thing they're looking for.

"When I go into a presentation, I don't say `Where's the set-aside?" says James Reynolds Jr., CEO of Loop Capital Markets, a Chicago firm launched in September that has seen its business grow like gangbusters. On the contrary, Reynolds asserts that he has to be better than his competitors to win new business and establish credibility. "We're the new kid on the block, so we've got something to prove," he says.

In one deal in which Loop acted as sole financial adviser, the Illinois Sports Facilities Authority entered into a $105 million forward interest-rate swap in connection with refinancing for the Chicago White Sox's new Comiskey Park. The deal amounted to a net savings of $11.8 million. Separately, Loop has co-managed the underwriting of $2 billion in municipal bonds, and has been a selling group member for another $4 billion worth of muni bonds.

MUNICIPAL BONDS AND INDUSTRY CONSOLIDATION

That Loop Capital is doing well in the muni business defies conventional wisdom. Some observers, citing the sharp decline in municipal issuances from 1994 through 1996, believe the muni industry is going the way of the dinosaur. But other experts and recent data suggest the muni bond business is in no way down for the count.

In February, for instance, municipalities issued $22 billion in bonds to finance everything from building local schools to street improvement projects. The February figure marked the best single month ever for municipal issuances, according to Securities Data Co., a financial information services firm in Newark, New Jersey. Consider also that last year, municipal underwriting totaled $215.1 billion. While that amount is down some 25% from the height of the muni business, 1997 still ranks as the third best year on record for municipal issuances.

Last year was surpassed only by 1993, which saw $289.6 billion in deals, and 1992 when it hit $231.5 billion. The volume of offerings in which minority firms were lead-or co-managing underwriters reached $65.6 billion in 1997, compared with $61.9 billion in 1996. The recent uptick in issuances strengthens the resolve of those involved in underwriting municipal debt.

"I'm still a big believer in munis. It's a very viable, profitable business if you can be competitive," insists Napoleon Brandford III, chairman of Siebert, Brandford, Shank & Co. L.L.C. (No. 6 on the BE INVESTMENT BANKS list) Brandford said 90% of his business is munis; the rest is federal agencies. In September 1996, amid an investigation into the business practices of Grigsby Brandford & Co. founder Calvin Grigsby, Brandford and Suzanne Shank left the firm to form SBS. Brandford and Shank own 51% of SBS; the remaining 49% is owned by Muriel Siebert & Co. Inc.

Pointing to the collapse of Grigsby Brandford and other black-owned firms, some industry watchers say many African American investment bankers have fallen victim to run-ins with regulators, net capital problems, tougher industry conditions, and--in some instances--racism directed at successful black concerns.

In any case, Brandford doesn't have time for a pity party. "I don't view myself as a victim," he says, adding that it's a misconception in the media that African American-run firms are the primary companies that have gone out of business. "Ten years ago, some of the top firms on Wall Street were Salomon Brothers, E.F. Hutton, Drexel, Rothschild and First Boston," he notes. "Those companies are no longer in business, but nobody wants to talk about that." Though markets and firms change, Brandford contends, "The players remain, perhaps just at different places."

GROWTH VIA DIVERSIFICATION

Muni bonds may be the staple some players still depend on, but several investment banking shops have steered completely away from urban and suburban finance altogether. One, Utendahl Capital Partners, has made diversification into new businesses a way of life. Founded in 1992, Utendahl was the first minority-owned investment bank to specialize in taxable fixed-income securities, and has since broadened its business to include equity and convertible securities, corporate finance, mortgage and real estate finance, structured finance and financial advisory services.

The firm's money management affiliate has also experienced explosive growth. In 1995, Utendahl Capital had $150 million in assets under management. Today, it manages more than $700 million for blue-chip clients including Colgate-Palmolive Co., RJR Nabisco and Time Warner Inc.

President and CEO John Utendahl says his strategy is very simple. "Diversification minimizes risk. That's a very basic concept," he says. "You can't put all your eggs in one basket and expect to succeed in this industry." To further buttress the firm's success, Utendahl Capital has teamed up with America's biggest brokerage firm, Merrill Lynch & Co. Merrill was one of the original investors in Utendahl but now owns less than 20% of the company.

It's an increasingly common strategy being pursued by African American investment firms. But it's also one that's generating a lot of controversy. Benita Pierce, one of the few African American women in the business to head her own firm, B. Pierce & Co. Inc., has been approached by majority-owned institutions looking to enter into a relationship with a black-owned firm. But Pierce turned down the offers because she questions the wisdom of such arrangements. "Look, no one's going to give you millions of dollars and not have something to say."

Utendahl acknowledges that "it's very important that we show we have independence," even as he shrugs off criticism about his Merrill Lynch partnership. "Merrill Lynch is a limited partner," he notes, "and synergy is the game." Besides, "every business school teaches you that strategic alliances are one way to sustain and promote growth in any industry." In considering the firm's needs, "we weren't looking to reinvent the wheel," he adds.

Utendahl Capital isn't the only investment bank leveraging the deep pockets and other resources of majority-owned firms. Jefferies & Co. has a 19% equity stake in Williams Capital, and Blaylock & Partners has ties with Bear Stearns & Co., which has an 18% ownership interest. For Blaylock, the partnership has helped lead to some high-profile deals in the corporate bond market.

Blaylock made history in 1996, when it became the first minority-owned firm to lead a corporate bond deal in excess of $100 million. Blaylock underwrote $300 million in debt for the Tennessee Valley Authority. In 1997, the firm came back and lead-managed a $150 million bond offering for Texaco Inc. in the wake of the oil company's settlement of a multimillion-dollar racial discrimination lawsuit.

In 1998, the Bear Stearns alliance has already helped Blaylock get the nod to underwrite and sell to institutional investors $800 million in corporate bonds issued by Walt Disney, Ford Motor Co. and a division of General Motors. Other minority- and women-owned firms, such as Williams Capital and Muriel Siebert & Co., also took part in these deals as part of an underwriting syndicate put together by Bear Stearns, which also profits. It earns underwriting fees from the arrangement and uses its affiliation with a minority-owned firm as a selling point with debt issuers.

FUTURE PROSPECTS

Since margins are slimmer on municipal business, expect African American firms with a strong capital base and distribution to turn to corporate underwriting.

"The corporate market certainly represents a new frontier," says Bernard Beal, head of M.R. Beal & Co. (No. 7 on the BE INVESTMENT BANKS list) He should know. A veteran of the investment business, Beal has twice tried to penetrate the corporate arena. Though his initial efforts were unsuccessful, he vows to take another run at the business. And for Beal, persistence has typically paid off. His firm also ranked among the top contenders during the era that saw the rise of Grigsby Brandford, Pryor McClendon, and WR Lazard. Today, however, Beal's operation is the only one of those four firms that remains largely intact. "Who could've thought that I would be the last man standing?" asks Beal.

Meanwhile, black-owned regional firms are carving out niches in specialty areas such as picking small-cap stocks, but most still concentrate on public finance. In Alabama, Harold Gilchrist, CEO of Gilchrist & Co. Inc. (No. 11 on the BE INVESTMENT BANKS list), says although he ventures into commercial development projects, underwriting muni bonds remains his bread-and-butter business. Gilchrist recently led the $60 million underwriting of a major theme park called Vision Land, located outside of Birmingham.

The bonds sold to finance the park were not rated; in an unprecedented show of cooperation, 11 municipalities in Alabama agreed to guarantee the bonds. "We've had to be a little creative to exist in this market," Gilchrist says. The 300-acre amusement park is to open May 23; the park's Web site has already received 7,000 hits from Internet surfers around the world. And Alabama officials credit Gilchrist with helping to put the state on the map.

"VisionLand is going to change Alabama to a destination point. All of this can be directly traced to Harold's firm," says Larry Langford, mayor of Fairfield. The VisionLand deal also led to a $20 million entertainment zone project for Gilchrist.

Such projects give Nathan Chapman hope for the future. His company focuses its research efforts on "the domestic emerging market," or businesses owned by African Americans, Latinos, Asians and women. Chapman offers a universe of publicly held minority businesses in which shareholders can invest. Moreover, he has identified a large pool of privately held minority companies that he says are ripe to go public.

Chapman isn't the only person who believes the time has come for African Americans to generate and build wealth. Beal, who also co-chairs the Securities Industry Association diversity committee, says a 1997 SIA study found that the number of African American households with incomes above $100,000 has tripled to 259,000 during the past decade. Furthermore, African Americans have over $400 billion in income.

Backed by those figures, Chapman Holdings may represent a "pure play" on the vitality and economic prospects for African American businesses. "We could well be the catalyst to African American economic development in this country," he says.

And make no mistake, while Chapman has lofty goals for minority-owned businesses in the U.S., he has equally ambitious objectives for his own firm. In particular, he's on the prowl for suitable acquisitions. He'd like to buy other African American investment banks in a bid to build one large, full-service firm that could boast expertise in everything from money management to trading stocks and bonds to corporate finance work.

Sound like a pipe dream? Not by a long shot, says Chapelle, who has long advocated consolidation among minority-owned firms to help solve many woes created by a lack of capital. And Chapman says he's ready to put his money where his mouth is--by offering what he calls "generous compensation packages, considerable equity in the firm and management responsibility."

Says Chapman: "The challenge is, as minority professionals, can we do it? Can we come together? I believe we can."