Preparing for a muni-less future.

As the municipal bond market dries up, forms are finding a new way to boost business--by adding corporate finance and asset management arms to their existing operations

BLACK-OWNED INVESTMENT BANKS HAVE all the hallmarks of a dying breed as access to their traditional markets, such as the municipal bond and mortgage-backed securities markets, come under assault on a number of fronts.

Last year marked the first full year of a ban on political contributions in the municipal industry, an attempt by federal regulators to end what has been called "pay to play." But many interpreted the new regulations as a way to shut the door on minority-owned and small businesses that were seeking access to municipal decision makers.

Affirmative action is also weighing heavily on the industry. A move is underway in the Golden State to put a proposition on the ballot in November to ban affirmative action programs. The California Civil Rights Initiative seeks to end preference goals that call for minority-owned investment banking firms to receive 15% participation on state debt underwritings.

Meanwhile, municipal volume continued to wane, slipping 3% from the previous year to the lowest level in the past five years. Several large firms, such as CS First Boston, Chemical Bank and Lazard Freres, have closed out their municipal business.

Black-owned firms are feeling the financial pressure of mounting legal fees brought on by continuing government and regulatory investigations into their business activities. "It's certainly a hostile environment," says Raymond J. McClendon, vice-chairman and chief operating officer of Pryor, McClendon, Counts & Co. (PMC). "It's certainly more costly to do business because of the zeal of the regulators."

PMC was among several underwriters under investigation by the SEC for possible fraud. The firm found the scrutiny costly and bad for business. But the major Wall Street investment banking firms, also known as bulge-bracket firms, felt little impact from the SEC probes.

"Larger firms can survive because their customers are deeper, much longer-term relationships. Nobody looks any differently at the CEO of a major bulge-bracket firm if they're having problems in the muni business. But it affected us across all product lines," McClendon says.

Some black-owned firms also were faced with the prospect of abandoning the tax-exempt market. But as rumors of consolidations abounded, executives at the largest black-owned banks stressed the need for firms to come together to form strategic alliances--to ensure growth and survival.

Still, black-owned investment banks are proving that it is a mistake to count them down and out of the Wall Street money game.

Despite a bleak market outlook, many of the top firms continue to grow core business lines, add staff and diversify into new lines of business. Some firms that were expected to fade into obscurity surprised detractors by making strategic acquisitions--and are now resurfacing, ready for success.

This doesn't mean the going was easy. Only one of the top black-owned investment banks senior-managed more than $500 million, down from three firms in 1994, according to Securities Data Co. At the same time, no significant strides were made on the international front, several bankers say.

MUNICIPAL MAVENS

As the stock market climbed to new heights, tax-exempt and taxable securities, which comprise the bulk of the historical investment banking activities for many black-owned firms, were whipped and rocked by the vagaries of the market. It wasn't the kind of year where one would predict that a firm would have a record year in municipal finance.

But Napoleon Brandford III, vice chairman of Grigsby Brandford & Co., was right on point when he predicted that 1995 would be the best year yet for his firm. Grigsby Brandford maintained its standing as a leading black-owned investment bank on the BE INVESTMENT BANK list by coming in at No. 2. Overall, the firm managed $1.4 billion and co-managed more than $16 billion in tax-exempt and taxable financing.

Undaunted by the municipal markets' negative outlook, Grigsby Brandford added 21 institutional salespeople in their New York, Houston, Sacramento, Calif., and Kansas City, Mo., offices. Most of those new hires will focus on the sale of taxable fixed-income securities. New York and Houston (a city that is ripe with municipal finance and corporate finance opportunities) are targeted for expansion by Grigsby Brandford.

COMEBACK KID

M.R. Beal survived a blanket investigation by the U.S. Attorney's Office regarding tax-exempt finance activities among investment firms in Wisconsin. As a result of the investigation, many firms had a tough time gaining a berth on municipal finance deals and, consequently, underwriting work dwindled. M.R. Beal's saving grace was that company executives plotted moves to ensure its survival. After no wrongdoing was found, the clouds lifted.

To raise cash, the company recently sold its asset management arm. And last October, M.R. Beal purchased Smith Mitchell Investment Group, a woman-owned investment banking firm headquartered in Seattle. The acquisition expanded Beal's established banking presence in the Northwest, boosting its municipal operations.

The company has been selected as one of a small group of co-managers of the proposed privatization of the U.S. Enrichment Corp., a federal agency that processes uranium ore. The transaction is expected to total more than $1 billion, one of the most significant privatization efforts by the U. S. government since the development of Amtrak.

REINVENTING SUCCESS

PMC's slide in the BE INVESTMENT BANK list from No. 2 last year to No. 5 this year might seem to signal a reversal of fortune. But the showing is more indicative of the firm's focus on other areas of business outside of municipal finance, says Raymond J. McClendon, the firm's vice chairman and chief operating officer. To illustrate this point, he noted that the firm had the second highest amount of co-managed business--$38 billion--among the top five black-owned firms in 1995.

PMC raised $5.6 million for investment management maven Maceo Sloan to finance his proposed purchase of a personal communications services (PCS) license, according to the investment firm.

The PCS financing effort illustrates PMC's major focus on telecommunications and media, primarily as a financial advisor aiding the launch of emerging entrepreneurs in those fields.

Elsewhere in municipal finance, the firm has added staff in the Dallas/Fort Worth region because it believes growth in this area will spawn a number of sizable infrastructure and corporate finance needs.

Another significant move for PMC has been the growth of its equity business. During the past year, the firm has increased its participation in corporate underwriting syndicates for initial public offerings for small and medium-sized firms.

Traditionally, the corporate finance market has been a tough nut for black-owned firms to crack. They haven't had the client relationships or the support of bulge-bracket firms to get into these deals. But things are beginning to change. "I think it's a recognition that we add value and we can add to the customer base," says McClendon of his firm's growing presence as a deal maker.

An interest in diversifying led WR Lazard & Co. to acquire another black-owned investment bank last year, Los Angeles-based Luther, Smith & Small. "WR Lazard had been a market leader in public finance and wanted to diversify into corporate finance. We saw it as a good marriage," says Michael Luther, chairman of WR Lazard & Co. and president of the firm's broker dealer subsidiary, which was renamed, WR Lazard, Laidlaw & Luther.

Diversification at WR Lazard also has meant a strong push for its financial advisory business, WRL Advisory Group. To grow the business, WR Lazard is focusing on the asset side of the balance sheet. They help issuers gain more value from existing assets by selling, privatizing or securitizing them. This is opposed to the more traditional forms of financial advisory directed toward municipal clients, advising them on the issuance of new debt or refinancing existing liabilities.

In this area, WR Lazard pioneered a real property tax lien securitization deal for Jersey City, N.J. According to Michael Cook, senior member of the advisory group and former chief of staff to Jersey City's mayor. the municipality retained WR Lazard as a financial advisor. The firm is also working on a deal to privatize Jersey City's water authority. The transaction is expected to generate $80 million of savings for the city.

Strengthening this business arm, WR Lazard has been appointed as an advisor to New York City to help it secure approximately $1 billion of property tax receivables. WR Lazard anticipates that investors, such as insurance companies, would be prime investors for the bonds collateralized by property tax liens. As part of the New York deal, the firm is developing a computer software package which it hopes to later market to other municipalities.

HIGHER GROUND

While many of the largest black-owned investment banks have made their mark in the municipal finance area, Utendahl Capital Partners L.P. bucks this trend, focusing solely on taxable deals. The strategy earned Utendahl its berth as the No. 3 investment bank on the 1995 BE INVESTMENT BANK list, having served as a senior manager of more than $400 million and a co-managing underwriter of more than $5 billion in taxable securities.

In the past year, the firm has concentrated on growing its sales and trading operations and enlarging its corporate finance and mortgage securities businesses, says John Utendahl, head of the firm. A strategy of controlled diversification at the firm is intended to help it develop strong expertise in a limited number of related business areas, such as mortgage-backed securities and corporate finance.

Utendahl formed a new Convertible Securities Group, and quickly became one of only four firms in the country to underwrite a synthetic convertible deal, serving as a co-manager of a $100 million deal transaction.

The firm also played a role in a private placement deal involving Pizza Hut, raising close to $30 million in senior and subordinated debt and equity. In addition to raising the $30 million, Utendahl served as the financial advisor to an undisclosed African American entrepreneur, assisting him in acquiring a Pizza Hut franchise territory in the mid-Atlantic region. The firm also has worked to expand its mortgage and corporate financial advisory businesses.

One might wonder at the timing of the expansion and diversification moves of some of the black-owned investment banks during a less than robust market. But the opportunities to gain market share couldn't be better, says Ronald E. Blaylock, head of Blaylock & Partners, L.P.

"The markets are becoming two-tiered. There's a place for very large firms and a growing need for smaller investment banks with 200 people or less," Blaylock says. "Those people with a niche who specialize in a few products will do well if they know those products well and add value."

Having worked at Utendahl, it was only natural that Blaylock would focus on taxable securities when he formed his own firm. The firm's first deal in the markets was as sole manager for a $500 million Federal National Mortgage Association mortgage-backed security. Blaylock has continued to hit higher ground, diversifying into the underwriting, trading and sales of stocks and bonds and most other taxable securities, including corporate bonds, mortgages, asset-backed securities and other federal agency debt.

The firm has grown from one full-time employee to a staff of 34. The company is also looking to add an asset management arm before the year's end, Blaylock says. Potential clients include pension funds and high-net-worth individuals. "It's a good annuity business. It's talent-driven," Blaylock says, explaining why the new business line would fit well into the company's arsenal of offerings. "We think we've got a good idea of how to assess talent.

THE NEXT GENERATION

After helping to put WR Lazard on a firm footing after the death of Wardell Lazard, Kenneth E. Glover, vice chairman and CEO, was on the prowl for a new challenge. He found it in Lintz, Glover, White & Co. Inc., a firm specializing in municipal reinvestment and cash management.

Joining the firm, (formerly known as Pacific Matrix Securities Inc.) in July, Glover was soon followed by another former WR Lazard executive, director and principal Dwight White.

White and Glover, co-partners in the firm, also had an equity stake in it, which converted the firm from a majority-owned to a minority-owned entity. They also added broker dealer operations to the firm. Founded in 1988, Lintz, Glover & White has offices in New York, California, Texas, Pennsylvania and Ohio.

The firm symbolizes a move by minority-owned firms into more specialized areas. It continues a recent and growing trend among black investment banks to advance to the next level through consolidations and acquisitions of majority-owned firms. "We're the only minority-owned firm that does this," Glover asserts of the firm's cash and interest rate risk management capabilities, which employ such instruments as guaranteed investment contracts. But that assertion may not hold for long as black-owned investment banks diversify into areas other than underwriting and selling securities.

TOP FIVE B.E. INVESTMENT BANKS BY MUNICIPAL ISSUES

RANK                   COMPANY                  PERCENT OF
                                                TOTAL ISSUES

1                      CHARLES A. BELL              100%
                       SECURITIES CORP.

2                      HOWARD GARY & CO.            100%

3                      POWELL CAPITAL               100%
                       MARKETS INC.

4                      S.B.K. BROOKS                100%
                       INVESTMENT CO.

5                      WARD BRADFORD & CO.          100%

Municipal for the year ending Dec. 31, 1995.
Source: Securities Data Co. Inc., Newark, N.J.
TOP FIVE B.E.
INVESTMENT BANKS
BY CORPORATE ISSUES

RANK                   COMPANY                  PERCENT OF
                                                TOTAL ISSUES

1                      LINTZ, GLOVER &           99%
                       WHITE CO.

2                      STURDIVANT & CO. INC.     90%

3                      WR LAZARD & CO.           68%

4                      UTENDAHL CAPITAL          46%
                       PARTNERS L.P.

5                      PRYOR, McCLENDON,         38%
                       COUNTS & CO. INC.

Municipal for the year ending Dec. 31, 1995.
Source: Securities Data Co. Inc., Newark, N.J.