Jefferies plunges into investment banking.

And it too eyes ways for pension funds to aid small firms

Now carving out its portion of the investment banking fortune is the Jefferies Group Inc., the West Los Angeles-based brokerage started 30 years ago by Boyd Jefferies.

Investment banking, also called corporate finance or underwriting, is a bit new for Jefferies. Under founder Boyd, the publicly held Jefferies Group became the place where the titans of the securities world -- insurance companies, pensions and corporate raiders -- traded huge blocks of stock too large for the New York Stock Exchange to handle efficaciously.

"We put the buyer together with the seller, so the transaction won't move the market," comments Frank Baxter, Jefferies' plain-talking chairman and chief executive, who took over when Boyd departed in 1986. "Through all of our operations, about 5 percent of the nation's daily trading volume is done through Jefferies."

But the jumbo-block market more or less matured in the mid-1980s, prompting Baxter, who arrives at work at 3 a.m., to contemplate new horizons for Jefferies. With Jefferies' contacts and knowledge, and with dozens of Drexel Burnham Lambert refugees looking for work, investment banking seemed a natural choice by 1990.

Almost en masse, onetime Drexel denizens have trooped to Jefferies.

"We now have 72 people in corporate finance; about 50 of those came from Drexel," says Baxter, who owns 6.91 percent of Jefferies' common stock outstanding. "It has become a significant profit center for us."

And profits are up. The 30-year-old company just reported it posted a 1991 net of $9.87 million on record revenues of $195.9 million, compared with a net of $6.72 million on revenues of $168.1 million the previous year (profits by department are not made public).

Responding to the good news -- and general strength on Wall Street -- Jefferies' stock traded last week in the upper end of its $9.25 to $16.25 a share 52-week trading range.

Jefferies has limited its investment banking activities to the debt side of the ledger, preferring to connect institutional lenders to corporate borrowers, through the issuance of high-yield bonds, also called subordinated debt. Many of the bonds are so-called private placements, which means the bonds are not registered with the Securities and Exchange Commission.

To date, underwriting stock has not been Baxter's cup of tea. "The IPO (initial public offering) is not really for us," explains Baxter. "By its very nature, the IPO is sort of a chicken-and-egg thing, and is going to be risky. We won't do anything that isn't of the very highest quality."

As to questions about the worthiness of modern-day high-yield bonds, Baxter brushes them aside. "These days, the companies issuing high-yield debt are considerably less leveraged, and there are much tighter covenants (agreements on repayments) than in the mid-1980s. There is no comparison."

Issues must be rated "BBB" or better to be liquid, notes Baxter, and that rating requires that issuing companies meet certain financial criteria.

Some recent issues underwritten by Jefferies: $150 million debt for the Durham, N.C.-base tobacconists the Liggett Group; $325 million in two debt issues for Arizona-based Magma Copper (co-underwritten with Goldman Sachs & Co.) and $75 million for New Jersey-based manufacturer Calmar.

Jefferies, with about 480 employees, also has branches in New York, Chicago, Dallas, Boston, Atlanta and London.

The firm's new corporate finance business is complemented by its 3-year-old high-yield bond trading department, which has about 50 employees.

Baxter credits the high-yield bond trading department with allowing the underwriters in corporate finance to do their job. "In the last third of last year, the financing window opened and we were able to perform some tough assignments by creative design work assisted by the placing (selling) power of the high-yield bond department," says Baxter.

For the rest of the 1990s, Baxter sees a crying need to connect large pools of capital -- particularly pension funds -- to America's growth companies, particularly small- and medium-sized enterprises.

"It's a shame all the pension funds are sort of directed to invest in the same 900 companies," observes Baxter, describing the nation's large blue-chip companies that meet pension fund criteria for safety. "Those are actually the companies that are shrinking payrolls, such as General Motors," says Baxter. "All the jobs are being created by firms with 100 employees or less. And I think it is a shame to invest overseas when there are plenty of investment opportunities with small companies -- right here in Southern California -- that deserve capital to grow."

Baxter, who has been with Jefferies since its inception, says a challenge for his firm in the 1990s is to connect the capital-hungry small- and medium-sized companies to the large pension funds.

One possibility, he says, is to issue bond-type instruments backed by the assets and revenues of a variety of medium-sized companies, diversified by industry, geography and other factors.