Investment firms show what they can do.

After years of laboring in relative obscurity, black investment banks take the spotlight by doing unprecedented deals.

For nearly 20 years, black-owned investment banks operated under a "veil," as W.E.B. DuBois put it. While they built varied portfolios in areas ranging from municipal, corporate and international finance to advisory services and asset management, only the finance cognoscenti recognized their skills. Those outside the world of high finance were largely blind to the significance of these minority-owned firms.

No longer. Last year, in several unprecdented deals, top African-American investment banks displayed their analytical and administrative bona fides before a broad spectrum of potential corporate and municipal clients.

Their timing was perfect. Most investment banks, including black-owned ones, had a strong and profitable year in 1992. But it was no time for self-congratulation. The investment industry was changing, black-owned firms included. Increasingly, firms took one of two paths: Some tried covering a spectrum from corporate and municipal finance to individual stock dealing, while others refined specializations in high-profit niches.

The trend did not surprise the CEOs of black investment banks. The entrepreneurs who run these firms are Wall Street veterans. They know that adapt or die is an everyday survival tactic. And their firms' relative youth and size may give them an edge over the competition. Many black firms were founded just before or slightly after the 1987 Wall Street crash and grew slowly and steadily, building expertise in a variety of carefully chosen areas. Unlike their larger competitors, they did not overextend themselves in staff or expenditures and, thus, did not need to trim back.

Several black investment banks are full-service national firms, providing financial advice, selling securities and underwriting bonds and stocks for municipalities and, increasingly, corporations and institutions. Others are firms that focus tightly on underwriting issues in such areas as regionally based public finance or mortgage-backed securities.

Most are looking for synergies with other minority- or women-owned companies. Who knows? Perhaps someday, a black investment bank may team up with a black commercial or savings bank to sell stock.

A Breakthrough Year

In 1992, lower interest rates contributed to record-breaking municipal business nationwide. This year, many firms expect municipal work to soar with the unfolding of the Clinton Administration's plans to rebuild the country's crumbling infrastructure. Low interest rates also render corporate financing or refinancing attractive. Last year, several black investment banks made inroads in corporate finance, advisory services and in the mortgage-backed securities business. But with more cities trying to diversify their underwriters and more black officials in decision-making roles, municipal finance was still the busiest sector. The top 100 investment banks underwrote 9,668 new long-term municipal issues, excluding private placements and nonprofit issues, worth $221.7 billion in 1992. Three black firms--Grigsby Brandford & Co. Inc., Pryor, McClendon, Counts & Co. Inc. and W.R. Lazard & Co.--were in this elite group. They led a total of 35 municipal issues worth $1.4 billion.

All investment banks benefited from lower interest rates, according to Wardell R. Lazard, CEO of New York City-based W.R. Lazard (No. 3 on the BE INVESTMENT BANK LIST). Projects became feasible as interest rates dropped and municipal issuance grew, forcing cash-poor cities and states to borrow in order to keep operating.

Last year, the 13 firms on the BE INVESTMENT BANK LIST co-managed 812 long-term municipal issues worth $107 billion. But their CEOs want more than full credit as part of a pool of underwriters. They want their firms to be selected to lead deals. Why? The lead or book-running manager chooses the issue's co-managers and decides how many bonds each gets. In most instances, the senior manager or group of co-senior managers keep the majority of the bonds and parcel out smaller shares to co-managers. The more you sell, the more you make: Investment firms profit from the spread between money paid for bonds and their selling price.

In 1992, however, there were several break-throughs. The main one was the city of Denver's choice of Pryor, McClendon, Counts (No. 2 on the BE INVESTMENT BANK LIST) to lead-manage its nearly $400 million airport debt package. It was the largest municipal finance deal ever led by a black-owned firm. Farther west, San Francisco-based Grigsby Brandford (No. 1 on the BE INVESTMENT BANK LIST), made good on its promise to shift steadily from co-manager to senior manager status and, in the process, beat out larger competitors. In January 1992, it became the first black firm to lead-manage an issuance for the San Francisco Public Utility Commission, besting PaineWebber Inc. and Goldman, Sachs & Co. to win a $107 million water revenue bond refinancing. At the time, Thomas Elzey, general manager of the Public Utility Commission for the city and county of San Francisco, said Grigsby Brandford created a structure with the greatest level of savings. "This showed that they are clearly in the league with the big boys in terms of quality and technical proficiency," Elzey asserts.

Grigsby Brandford also hit the bull's-eye in Southern California. First, it senior-managed a $107.8 million Los Angeles County Transportation Commission deal for a historic all-female and minority-owned underwriting team. Then Grigsby Brandford ran the books on a $75 million financing for the San Diego Gas & Electric Co., structuring the transaction so that its client received a lower than expected interest rate. This money-saving transaction attracted notice and clients.

Unfortunately, most black firms do not get these opportunities. Newark, N.J.-based Securities Data Co. Inc., which tracks financial information, reported that, in 1992, Grigsby Brandford placed 58th with $552 million, Pryor, McClendon, Counts was 61st with $484.9 million and W.R. Lazard was 73rd with $349.7 million, among the top 100 senior managers in long-term new municipal issues. By contrast, industry leader Goldman, Sachs managed 311 issues worth $28 billion.

Nathan A. Chapman, CEO of the Baltimore-based Chapman Co. (No. 9 on the BE INVESTMENT BANK LIST) was not worried by the gap. Last year, he forecasted "increasing opportunities for minorities to run transactions. [Once], the challenge was just to get in on a manager level."

Taking Finance To The Next Level

The most frequent excuse as to why minority-owned firms are not book managers is that they do not have enough capital. Firms are liable for unsold bonds and must be able to pay for them. But is this factor overplayed? In large municipal issuances, a senior management group divides the liability. The bonds are premarketed for customers ready to buy, and if some are unsold, the senior managers each take a share.

The goal is to sell all your bonds. And that is why Malcolmn Pryor, CEO of Pryor, McClendon, Counts, says, "It's more important to have good salespeople and traders than to have capital. You can have $1 billion in capital, but if you don't have people who can structure, trade and sell, it won't matter."

Tennessee Valley Authority executive vice president and CFO William F. Malec believes that using black firms for its offerings--which start at $500 million--makes sense. "I go to whomever is selected lead manager and tell them to contact all interested firms," explains Malec. "It doesn't cost you a penny to invite [black] firms in if they participate on the deal's terms, and you have expanded the market for your securities. I can't understand why others don't see this."

Clearly, black firms are not blind to new business. Last year, several widened regional niches. One, Howard Gary & Co. (No. 7 on the BE INVESTMENT BANK LIST), participated in 35 deals. More than 90% of them were public finance-related and occurred in either Florida or Texas. The firm senior-managed one deal and co-senior-managed eight.

On the West Coast, Charles A. Bell Securities Corp. (No. 6 on the BE INVESTMENT BANK LIST), has become well known for structuring and marketing transportation-related issues. In 1992, the San Francisco-based firm was financial adviser on three major transportation bond underwritings. It also competed against larger majority firms to become financial adviser to the Riverside (Calif.) County Transportation Commission. Last January, Bell Securities won the two-year renewable contract.

Federal and affiliated agencies tried to catch up to state and local municipalities in broadening opportunities in 1992. For example, last September, the Federal National Mortgage Association (Fannie Mae) unveiled "Access." This program added six black firms to its 48-member debenture selling group and created a 10-point plan for the firms to underwrite discount notes, long-term debentures and notes, mortgage-backed securities and real estate mortgage investment conduits (REMICs). The firms became medium-term note agents, earning full selling commissions, with opportunities to earn partial fees on the agency's residential finance securities.

The group included M.R. Beal & Co. (No. 4 on the BE INVESTMENT BANK LIST), New Orleans-based Doley Securities Inc. (No. 8 on the BE INVESTMENT BANK LIST), Grigsby Brandford, W.R. Lazard, Pryor McClendon, Counts and Utendahl Capital Partners, L.P. (The latter firm was founded in May 1992 and, because it hadn't been in business for a year as of Dec. 31, was not eligible for the BE INVESTMENT BANK LIST.) In the last three months of 1992, the sextet handled $2.2 billion of Fannie Mae business, co-managing three real estate deals and issuing medium-term notes.

The Resolution Trust Corp. (RTC) was another source of steady business. The RTC's charge to oversee the management and sale of failed savings and loans contains a federal mandate to provide opportunities for minority- and women-owned companies. This may be one of the main reasons why black investment bank activity grew in the mortgage-backed securities sector.

Even so the black/white business gap remained immense. In 1992, Securities Data recorded that 1,001 mortgage-backed securities issuances worth $377.8 billion were done with full credit to 23 book managers. The same year, six black-owned investment banks: Pryor, McClendon, Counts; Utendahl Capital Partners; W.R. Lazard; Laidlaw & Mead (a wholly owned subsidiary of W.R. Lazard); Doley Securities Inc.; M.R. Beal & Co.; and Washington, D.C.-based Ewing Capital Inc. also underwrote issues. But the black firms did not lead-manage any deals. They participated in just 74 issues worth $35.4 billion.

RTC senior securitization specialist Sandra Nobles tries to put a positive spin on the gap. First, the RTC was not the source of all of the mortgage-backed securities issuances, she observes. Second, Nobles says, the RTC averaged two to three mortgage-backed securities issuances per month and a minority-owned firm was often co-manager. That's nice, but every investment banker knows running deals garners more money and respect.

Strides, albeit small ones, are being made in public finance. But in 1992, black investment banks where still bit players in major corporate equity offerings. These underwritings may involve a new company's initial public offering or a stock offering by an existing company. A syndicate of investment bankers purchases shares from the issuer and resells them for a profit to investors. Black investment banks usually sell shares for the issuee's underwriters. In 1992, for example, Camden, N.J.-based Sturdivant & Co. Inc. (No. 12 on the BE INVESTMENT BANK LIST) participated in more than 30 corporate equity offerings for such companies as GTE, Westinghouse and RJR Nabisco.

But serving as a small part of a selling group means your firm has no financial liability and will not share in the syndicate residuals of the offering. At press time, no minority-owned investment bank had been senior manager in a major corporate equity transaction.

Unfortunately, even companies much smaller than the 1,000 largest public corporations ignore black investment banks. This includes black corporations. In October 1991, BET Holdings Inc., the parent company of Black Entertainment Television (BET) and Emerge and YSB magazines went public, and black investment banks such as Doley Securities sold shares. But BET--a BE INDUSTRIAL/SERVICE 100 company--chose two white firms to co-lead its initial public offering. It's a Catch-22: The big firms are better known and have more contacts and capital.

Pryor, McClendon, Counts did not wait for an invitation. Last year, the investment bank served as underwriter and principal distributor for the Atlanta Growth Fund, a new mutual fund primarily made up of Atlanta-based companies' stocks. The fund, which raised $6 million through a Pryor, McClendon, Counts-led public offering, pioneered the method of using stocks in companies from a given city as an investment vehicle.

There are other ways for firms to expand. One is to hire staff with well-respected expertise. For example, M.R. Beal hired Raoul L. Carroll, the former president of Ginnie Mae, to oversee its core public and corporate finance business. It didn't hurt that Ginnie Maes are the world's most widely traded mortgage-backed securities. It also hired Ronald F. Cassinari, a consistent member of Institutional Investor's All-America Research Team, to head equity trading.

Another New York City-based firm, W.R. Lazard, not only beefed up its senior management, but also worked hard at creating a pool of future colleagues and clients. Last year, the firm hired Kenneth Glover, formerly a managing director of the Drexel, Burnham, Lambert & Co., as vice chairman and chief administrative officer. And, the firm held its fourth annual "A Day on Wall Street" for high school seniors (see cover story, "Stocks 'R' Us," May 1993).

Global Business

By and large, black investment bankers did not bemoan their opportunities in 1992--some even expanded globally. Two firms looked to Africa. Last July, M.R. Beal, an investment company, connected more than 40 asset and pension fund managers with an African Development Bank (ADB) delegation that sought new financing. The New York City-based firm also set up M.R. Beal International, a wholly owned subsidiary, in Dakar, Senegal. At the same time, Doley Securities strengthened its African link. First, it was sole agent for an ADB $100 million medium-term note private placement. The firm, whose founder, Harold E. Doley Jr., was U.S. executive director to the ADB from 1983 to 1985, also hosted the Republic of Zambia's President Frederick J.T. Chiluba on an investment-seeking mission to the United States.

Meanwhile Rodney G. Ellis, director of the Houston-based Apex Securities Inc. (No. 5 on the BE INVESTMENT BANK LIST), also looked beyond the United States. He led a trade mission to Mexico and executed equity trades for European-based companies. These deals were important he said, because "we have to think globally. It's not enough to do business in Detroit or Dallas."

It appears that black investment banks have lifted their veil and are ready for an expanding world of customers.