No Longer Business As Usual.

A new breed of investment banker is aggressively pursuing corporate accounts and strategic alliances.

AFRICAN AMERICAN INVESTMENT FIRMS faced a curious paradox in 1998. On the one hand, some firms thrived amid a bullish stock market, a reenergized public finance sector and increased opportunities in corporate bond underwriting a lucrative territory long dominated by Wall Street's top-tier brokerages. On the other hand, African American financial pros suffered last year from the same woes and then some--that afflicted the rest of Wall Street. Mergers and acquisitions resulted in thousands of across-the-board job cuts, and black investment bankers, brokers, traders and money managers got their share of pink slips. Profits were tougher to come by and, of course, competition intensified from every possible direction.

Amid such circumstances, the mettle of black-owned firms was truly tested. In response, many businesses rose to the challenge--and some even achieved their best annual performance ever--in terms of deals managed, revenues and profits. Still, a lot of African American investment banks had to fight tooth and nail just to break even. "Access to capital remains the No. I problem facing black-owned broker-dealers," says Tony Chapelle, a longtime industry observer and editor of Securities Pro, a trade publication that tracks African Americans on Wall Street.

Although 1999 is certain to present the black broker-dealer community with new challenges, key players will no doubt keep marching on several right into the record books.

Take Bernard Beal, for instance. The chairman and CEO of M.R. Beal & Co. (No. 8 on the BE INVESTMENT BANK list) plans to allow his institutional customers to buy securities over the Internet. If M.R. Beal is successful, it'll be the first minority-owned firm to sell fixed-income securities via the Net.

Then there's Christopher Williams' firm, Williams Capital Group (No. 3 on the BE INVESTMENT BANK list), whose application for membership on the New York Stock Exchange was in the final stages at press time. This is a major feat, given the tens of thousands of broker-dealers nationwide and the less than 400 members of the NYSE. If approved, Williams Capital will be one of a handful of African American firms that have, over the past 30 years, gotten a seat on the Big Board.

But first let's take a look at the high-lights of 1998, and tell you what to expect for the rest of this year.

MUNI BONDS STAGE A COMEBACK

Perhaps one of the biggest surprises of 1998 was the resurgence of the municipal bond business. For the past five years, many observers had all but written off this area--citing slimmer profit margins, and attacks on affirmative action initiatives that channeled state business to minorities and heightened, competition.

To varying degrees, these factors had an impact on minority-owned firms engaged in muni operations. But none of them negate one key fact driving the muni business: more than 13,000 states, counties, cities, districts and agencies across America need an estimated $2 trillion to finance a myriad of public projects over the next few decades. Roads need to be rebuilt; school buildings need overhauling; and stadiums and convention centers need upgrading.

As a result, some $280 billion in municipal bonds were brought to market last year, second only to a record $290 billion in new issues in 1993, according to Securities Data Co. of Newark, New Jersey. Meanwhile, the number of municipal bond deals in 1998 peaked at 14,367, topping the old record of 14,015 transactions in 1993. On a year-to-year basis, municipal bond issuance was up 30% in 1998.

No minority-owned firm did a better job of capitalizing on the increased volume in 1998 than Siebert Brandford Shank (No. 1 on the BE INVESTMENT BANK list). SBS served as the lead manager of $2.5 billion in total deals last year and co-managed another $26.1 billion worth of bond offerings. As lead manager, or senior manager, an investment firm does everything from providing complex analysis and advisory work to structuring transactions and selling the lion's share of the bonds in an offering. SBS's largest deal last year was a nearly $300 million offering for Detroit public schools.

The firm also lead-managed five deals worth over $ 100 million--very large transactions considering the muni market is overwhelmingly a small-issue arena. Roughly 70% of all new muni offerings in 1998 were $10 million and under.

When SBS competes for business, issuers "are frequently surprised at the size and complexity of the deals that we've done" says president and CEO Suzanne Shank. "But we always try to come through and do a better job than our competition. That's what we have to do to have staying power."

SBS employs 35 people, mostly bankers and sales professionals, in 10 offices across the U.S. The firm was founded in late 1996 and originally operated as a unit of Siebert & Co., which is owned by Muriel Siebert, who's white. But in 1998, Shank and Chairman Napoleon Brandford III split off from Siebert & Co. and got approvals from securities regulators to operate SBS as a separate entity.

Though Siebert owns 49% of SBS and Shank and Brandford own 25.5% each for a combined 51% stake, SBS "is not a subsidiary" of Siebert & Co., Shank explains. "We're now a separate company with a separate broker-dealer license."

She adds, "Muriel is an investor and we can call on her as needed in certain cases. But Napoleon and I basically run the firm," Shank says. "Our focus from day one was to have a majority black-owned firm that would be respected in the industry."

Like Shank, most muni players stress that their solid track record is what wins them contracts--not their status as minorities. "If the first card you play is, `I'm a minority so give me the business,' that goes nowhere fast," says Arthur Powell, chairman of Powell Capital Markets Inc. in Roseland, New Jersey (No. 11 on the BE INVESTMENT BANK list). However, "If you market yourself as a competent firm, and you have a demonstrated record of performance, and if the firm happens to be a minority-owned business, then that's much more acceptable."

Yet, for all the new volume that is coming into the market, some black-owned investment firms are finding it prudent to diversify their operations. "We used to be 100% muni finance. Now mortgage-backed securities and federal agency underwriting represent 10% to 20% of the business," says Morgan Bassey, who heads Harvestons Securities Inc., a Denver firm founded in 1993.

Harvestons was recently tapped to co-manage a variety of muni offerings--including an $80 million refinancing for the Denver Convention Center and a $46 million bond issue from the Colorado Water and Public Authority. Nonetheless, this year Bassey plans to expand into equities as a way to decrease his reliance on fees from municipal transactions.

That's probably a smart strategy, especially since the average profit, or so-called gross spread, to a firm that underwrites a municipal bond offering has dropped to $7.84 per $1,000 of bonds from a high of $23.25 per $1,000 in 1982, according to Securities Data Co.

Elsewhere, however, firms like Rice Financial Products Co. of New York continue to carve out lucrative niches for themselves. The company's origins were in transactions such as derivatives and interest-rate swaps. In fact, the firm is the only African American investment bank that participates in that market as a principal and counterparty. Still, Chairman J. Donald Rice notes that "not a single transaction that we've ever got in the derivatives market was on the basis of being any kind of affirmative action or target group. It just doesn't exist in the derivatives market." The firm's highlights include several firsts for the muni market, such as the sole execution of a $300 million derivative financing for a California pension system.

This year, Rice Financial completed the acquisition of Houston-based Apex Securities, a firm with a first-rate track record in the muni market. In 1998, Apex (No. 4 on the BE INVESTMENT BANK list) senior-managed $976 million in municipal offerings and co-managed $3.96 billion. Rice now plans to use Apex as a platform to further build his business. "Our goal is to leverage our expertise and dominant position in municipal derivatives and to expand that to the general muni market," he says. Since the acquisition, adds Rice, "our municipal underwriting is about twice the dollar volume it was before."

COMPETITION FOR CORPORATE BOND UNDERWRITING HEATS UP

Undoubtedly, the folks in the municipal finance sector face tough competition to gain new business and hold onto existing clients. But to hear some African American pros tell it, going head to head with the likes of Merrill Lynch and Goldman Sachs for corporate bond business isn't just cutthroat--it's out-and-out war. "You're competing against very large firms that are very well capitalized and have a history of relationships," says CEO Christopher Williams. "So when they have more artillery and a larger infantry, you have to operate more on your instinctive survival skills and be more nimble." It also helps, Williams adds, to "identify or develop niches where you can fill in a service that's not being provided."

Enter Williams Capital.

In 1998, the firm co-managed its first ever major corporate bond deals. Among the companies for which Williams Capital has served as underwriter are Ford, GM, Walt Disney, Wal-Mart, American Express and Con Edison. "That business is profitable and high profile in the market," says Williams, adding: "Our presence there has been very positive."

While acting as co-manager on these offerings, Williams Capital was able to sell bonds to a whole group of money managers and other institutional investors to whom the bulge-bracket firms had paid scant attention. Overall in 1998, Williams Capital lead-managed $1.54 billion in deals and co-managed another $6.11 billion in offerings.

Utendahl Capital Partners L.P. (No. 2 on the BE INVESTMENT BANK list) and Blaylock & Partners L.P. (No. 7 on the BE INVESTMENT BANK list) have also been highly impressive in the corporate underwriting arena. In 1998, Utendahl lead-managed $1.64 billion in deals and co-managed $9.6 billion. The bulk of the firm's underwriting business came from corporate bonds, but Utendahl also underwrote some mortgage-backed securities and agency debt.

This year, Utendahl has continued to snag big offerings, including co-managing an offering in January for GTE of California (see "A Strong Bond," Newspoints, this issue). Utendahl's role in the deal followed the bank's participation as co-manager in last August's $6.1 billion corporate bond issue by WorldCom Inc.--a deal that, at the time, was the largest ever issue in the corporate market.

For its part, Blaylock has played a role in the granddaddy of all corporate bond deals. In March, when AT&T tapped the debt market with a record $8 billion offering, Blaylock was one of the eight co-managers on the issue.

According to Securities Data Co., when taken together, minority-owned firms co-managed $20 billion of the $711.30 billion of investment-grade corporate bond deals that came to market in 1998. While that $20 billion figure is but a small piece of the overall pie, it marks an astronomical leap from 1997's comparable total of just $2.9 billion.

Some observers attribute the sharp rise in corporate underwriting by African American investment firms to the Rev. Jesse Jackson's Wall Street Project, which seeks, among other things, to increase minority participation in the financial world.

Harold E. Doley Jr., owner of New Orleans-based Doley Securities, is even more emphatic about Jackson's influence. "The most powerful African American investment banker on Wall Street is [the Rev.] Jesse Jackson," says Doley. "He's dictating who should be included in deals and everything." Moreover, since Jackson's Rainbow/PUSH organization is buying shares in a number of Fortune 100 stocks, "his impact on corporate America is truly being felt," Doley adds.

In some ways, the mere fact that African American investment bankers are now chasing multibillion-dollar deals--with or without Jackson's assistance--under-scores a key difference between the new generation on Wall Street and its predecessors. It's a change that isn't lost on Doley. Ironically, he's even seen how his youngest son has a different attitude toward money. "If my 21-year-old son sees a dime on the ground, he won't bend over to pick it up. But I'll stop to pick up a penny," says Doley. Then, he notes: "In volume, pennies add up."

Indeed, Doley knows about counting his pennies. Using his seat on the New York Stock Exchange, he executes trades for institutional customers. Doley's cut: 2 cents a share, and in some cases a penny and a half. It may not sound as alluring as an $8 billion AT&T deal, but it's kept Doley in business for nearly three decades.

CHAPMAN ON ACQUISITION BINGE

Against this backdrop, the Chapman Co. (No. 13 on the BE INVESTMENT BANK list) is trying to make its mark on corporate America as well. Chapman, which last year became the first black investment bank to go public (Nasdaq: CMAN), is on a bit of an acquisition spree. The concern recently bought Charles Bell Securities and is seeking to buy Universal Life Insurance Co.

In addition, Chapman has partnered with insurance giant Aetna, which is providing the firm with distribution muscle. The goal: provide convenient, one-stop shopping for individual investors--whether they want to buy stocks, bonds, annuities or other financial products.

Chapman, who calls America's inner cities "domestic emerging markets," no doubt wants to service the minority community and do some brisk retail business. But his stock, which debuted at slightly above $6 a share last year, now changes hands for around $7 a piece and is thinly traded. Some people think it may have to do with Chapman being a bit too acquisitive, particularly in buying Universal Life, one of the dwindling number of black insurers in this country. (See "Seeking a New Policy for Growth," this issue.)

"I respect Nathan Chapman immensely, but he made a horrendous mistake purchasing Universal," says Doley. As of April 1, the deal had yet to close and was subject to due diligence. Critics explained that after Universal sold off its crown jewel--the life insurance division of its operations--to another firm in Houston, all that was left were fledgling health and accident insurance units.

If Chapman did miscalculate, he won't be the first to have done so--rarely in business does just one miscalculation prove fatal. Just ask Bassey, founder of Harvestons. "We have never been able to raise one single cent from a bank," he says. "All of our money is family money."

So it was with some anxiety that Bassey took the plunge and invested $300,000 in 1998 to upgrade his firm's computer infrastructure, technology systems and to provide better execution and clearing for his institutional clients. He also expanded his business, opening several new branches across the country.

The results were mixed. His customers rave about the firm's service. But the expansion proved premature. In addition to the Denver office, Bassey had offices in New York, Cleveland, Chicago and Houston. Bassey had to close those branches after he quickly realized the overhead was more than he could afford to manage.

Now Harvestons has 18 employees in offices in Denver, Houston and Little Rock, Arkansas. "I don't want to go above 30 employees. If I didn't do the expansion, we would'ye turned a profit in 1998," he says. "But since we trimmed back, every month [in the first quarter of 1999] we've been profitable," Bassey says.

Harvestons' experiences, in many ways, offer a lesson for all African American investment firms. At every turn, success will be measured not only by clients wooed or by products sold, but also by how well firms adjust to changing or unworkable conditions.

Bernard Beal is already adjusting his business strategies based on client demands and sound management practices. "One of our goals is to let them buy securities over the Internet," he says. Beal decided to make the transition after many of his busy institutional clients said, in essence, that they wanted more service but less contact. "This business is going to become like the supermarket business, where different retailers compete for shelf space and visibility for their products," Beal predicted. In the case of investment firms, "you've got to be on people's screens; they've got to see your firm and know your name," he says.

Beal has another major change planned for 1999. "I own 99% of the firm and I would like to rationally see my ownership interest go down," Beal reveals. He plans to sell a piece--as yet undetermined--of the firm to his employees. "It's a logical first step," says Beal, adding that he sees the move happening "by year's end."

HEADING INTO THE MILLENNIUM

Looking forward, Chapelle expects minority broker-dealers to capture more corporate bond and equity underwriting business. In 1998, at least eight major financings, and in March of this year the $1.7 billion Delphi spin-off and the initial public offering of the Internet stock iVillage, involved African American investment banks. The trend toward diversification and a broader mix of products and services will also continue.

Powell, of Powell Capital Markets, says that to date most of his firm's success has been in school district financing and in solid waste restructuring. "Still, I don't think we'll ever return to the days when we made the money we made [15-20] years ago," Powell says. That's why his firm' is looking to diversify into other areas--most likely insurance brokerage and asset management.

For Williams Capital, 1999 will be a year of implementing plans that are already on the drawing board as well as new initiatives (see "Strength in Numbers," this issue). The firm has opened an office in London in an effort to extend its equity and fixed-income trading operation on the international side. But perhaps most important, Williams has completed the application process for membership on the New York Stock Exchange.

Williams Capital will lease a seat, which costs $250,000 or more a year. By comparison, when Harold Doley bought a seat on the Big Board 26 years ago, he paid $90,000 for it. The most recent seat that the NYSE sold in 1999 went for $2.6 million.

The benefits of having a seat on the NYSE are manifold. For one thing, a seat permits members to offer their clients direct access to brokers on the floor, cutting out middlemen and helping them to achieve faster execution of buy and sell orders. There's also a major credibility factor involved. Obviously, not all firms can pass muster with the NYSE, which imposes strict reporting standards, net capital rules and other compliance requirements on its members. That will likely help Williams Capital attract investors in Europe, many of whom are brand-name conscious and want to deal exclusively with major firms or those who are members of the NYSE. Still, Williams knows that other African American investment banks, including his own, face other hurdles ahead. "There's always going to be a perception that small size means limited capabilities," he says. "So the key is to demonstrate that that's not a fact."

1999 TOP 15 INVESTMENT BANKS SUMMARY

BLACK-OWNED INVESTMENT BANKS         1997          1998   % CHANGE

NUMBER OF EMPLOYEES                   311           392   26.05%

TOTAL ISSUES                     $122.539      $144.810   18.7%
(in Billions)

SENIOR-MANAGED ISSUES          $6,114.159   $10,668.850   74.49%
(In Millions)

CO-MANAGED ISSUES                $116.425      $134.140   15.22%
(In Billions)

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.3