Strength In Numbers.

By sharing equity with employees and snaring lucrative corporate-bond deals, Christopher Williams propelled his firm into the big leagues

IT'S HARD TO TELL BY LOOKING AT CHRISTOPHER J. Williams that he's a chameleon someone who seemingly has the ability to morph into anyone or anything he pleases. His tall, slender frame would, at first glance, make him appear to be the athletic type you would find in the NBA, but that would be deceptive. He holds an M.B.A. And though he appears staid, the 41-year-old CEO and president of Williams Capital Group L.P. has a remarkable capacity for adaptation, altering, refining and, when necessary, rebuilding his firm until success was within his grasp.

In the rough-and-tumble world of Wall Street, where investment banks are often as short-lived as Michael Jordan's baseball career, and severe market downturns have been the kiss of death for many firms, Williams Capital has survived and--added to its roster of megabuck deals.

Last year was nothing but net. The company scored major coups in the municipal- and corporate-bond market. In fact, Williams Capital was involved in underwriting more than $4 billion in investment-grade bonds for some of the nation's best-known monoliths, among them IBM, Wal-Mart and Walt Disney.

And this year the firm has served as the co-manager of several more major corporate-bond transactions, including the $1.5 billion deal for Bank of America and a $400 million assignment for GMAC, the subsidiary of General Motors.

By February, Williams Capital ranked 24th among all Wall Street firms in mortgage and asset-backed securities, and won five deals with proceeds exceeding $1.4 billion. In the government agency market, the firm served as the lead manager or co-manager in issuing more than $1.5 billion in bonds for the Student Loan Marketing Association (Sallie Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Bank (Freddie Mac).

Meanwhile, as the firm expanded into new territory, Williams Capital became involved in 12 major corporate commercial-paper programs in the money-market arena. Average money-market trading volume ballooned to well over $500 million on a daily basis.

Not bad for a man who everyone said was crazy for leaving a secure, fast-track Wall Street position to hang his own shingle five years ago. The New Milford, Connecticut, native has made his bones as a blood-and-guts entrepreneur. But in order to stay ahead of the pack, Williams Capital has had to keep transforming itself to adapt to market conditions and is presently still in the midst of its second metamorphosis while eyeing a third.

Williams has proven that he will reach any goal that he sets his mind to. Over the past year, he has made some innovative moves--including turning his shop into an employee-owned operation--and positioned his company to grab more lucrative corporate deals. With more than $7.6 billion in senior- and co-managed transactions, Williams Capital was selected as BE Financial Company of the Year. Williams and his firm represent the next generation of black investment bankers, ones who will continue to find opportunity through ingenuity and excellence.

"This is a tough business," says Williams. "You have to have skill, talent and preparation to make it. That's what we have been able to amass over the years. It's an all-or-nothing proposition."

OPERATING IN PERILOUS WATERS

In the early 1990s, the use of derivatives to create novel and complex securities became one of Wall Street's best-kept secrets. Williams' entry into the oft-perilous waters of entrepreneurship came when he set up Williams Financial Markets in April 1992 as a division of Jefferies Group Inc., a Los Angeles-based financial services company. The initial agreement between Williams and Jefferies gave Jefferies the right to purchase up to 49% of a successor firm.

When the company first opened its doors, it was solely focused on the then-thriving derivatives market, structuring transactions with debt instruments backed by the value of the underlying securities. The company would customize securities by using interest-rate swaps and options, tying the performance of securities to various benchmarks in the market.

It was a highly lucrative business. For Williams, the potential for engineering these financial instruments seemed limitless. In January 1994, Jefferies exercised its right to purchase 49% of the new firm Williams created. It was christened Williams Capital Group, L.P.

But in late 1994 the bottom fell out of the bond market. Most derivative bets were based on the widespread belief that interest rates would head lower, then the unthinkable happened--rates ratcheted up. In short, the derivatives market imploded.

To make matters worse, Orange County, California, one of the nation's most affluent zip codes, made history in the spring of 1994 by filing for bankruptcy protection after losing $1.69 billion through derivatives trading. This was the largest municipal bankruptcy ever. Derivatives became a four-letter word. The instrument was responsible for 100% of the firm's revenues.

"We faced the sobering reality that the marketplace does not always have a demand for esoteric products," says Williams. "Investors made a 180-degree turn against such instruments."

After raking in more than $2.5 billion in new bond issues in his first 18 months in business, the entrepreneur found himself struggling to survive in a market that forced even many bulge-bracket firms out of the bond business. Williams' firm was still in its embryonic phase and on the brink of closing down. "We were spoiled by the level of success we had at the start," he reflects. "Now our cash cow no longer existed and we had to face the possibility of going out of business. Our greatest source of capital was my checkbook."

He and his partners lived in fear of being conquered by a double whammy--the nose-diving bond market that had no appetite for new issues and a derivatives market that had dried up. But they refused to die. For seven months, with no profits, they battled to stay afloat. "We were really dead, "he says. "We just didn't have the energy to fall down."

By coincidence or divine intervention, in late 1993 Williams had begun to put together a blueprint for establishing a broker-dealer. "It was as if one day we had a flourishing derivative business with an idea of starting a broker-dealer, and then, all of a sudden, this idea of a broker-dealer was all we really had," says Janice Savin, senior vice president on the fixed-income sales desk at Williams Capital. Savin is also Williams' wife of 12 years.

Plans for the broker-dealer were aggressively accelerated the following year. But the three employees, badly bruised from the derivatives debacle, had to decide whether they wanted to join Williams in his move into uncharted territory or head back to the safety of one of Wall Street's established firms. "At one point, it seemed tempting to go back to the Street. We all had job offers, but we all had incredible trust and wanted to join him," says Bruce Usher, the firm's chief operating officer and a colleague of Williams' for 10 years.

THE MOVE TO DIVERSIFICATION

Any businessman who experiences a Lazarus-like resurrection from financial death learns a lifelong lesson. Williams is no different. "I quickly learned the importance of pursuing varied business lines," he says.

Though Williams' background was in fixed income, he was determined to learn the equities business. Employees recall a studious Williams poring over books and sitting on the equity-trading desk he set up as he learned every aspect of the business of executing stock trades for institutions. But with no strong institutional clients and no real competitive advantage, the firm had to launch a major marketing initiative to woo major corporations for whom they would provide equity research and trading services.

The firm celebrated a milestone in 1996 when it was added as the first commercial-paper dealer for Colgate-Palmolive, joining the deal with Wall Street heavy hitters Goldman Sachs and Citibank. "It was the first time that any boutique firm, let alone a minority firm, was named as a dealer on a commercial-paper deal," says Usher, who holds a major stake in Williams Capital. "It wasn't a huge financial milestone. But in terms of respect and credibility, it was as good as it gets."

Currently, Williams Capital offers equity and money-market trading, government-agency and corporate bond trading and underwriting capabilities. Such diversification has paid off handsomely. Revenues in 1998 were more than double those earned in 1997, thanks to the expanded business lines. Williams Capital also added more employees. Meanwhile, its mainstay business of buying, selling or advising companies on securities as capital transactions continued to grow.

As for that dirty word derivative, those products now only represent 10% to 15% of the firm's revenues. Instead, Williams Capital works with more plain-vanilla financial instruments, such as corporate and agency bonds and securities on the fixed-income side. Those securities don't give the same big bang to profits, but they can be issued in higher volume and create a predictable stream of revenues.

Companies that have done deals with Williams Capital attest to its high-caliber service and ability to deliver new investors. "Williams Capital was selected on their proven ability to sell bonds," says Cynthia Ranzilla, director of capital markets and banking at GMAC.

Williams always believed in building a solid structure. Maybe it comes from the fact that he started in architecture. A graduate of Washington, D.C.'s Howard University, he landed a job with an architectural firm in New Haven, Connecticut. But he faced two problems: there wasn't much work for architects and he wanted to get paid. He derided to pursue an M.B.A. at Dartmouth, where he suffered culture shock after attending school on the predominantly black Howard campus. Unsure of what route to pursue, he derided to take an offer at Lehman Brothers.

After eight and a half years at Lehman Brothers, Williams became an expert in the derivatives markets. That knowledge eventually led to his gaining the capital needed to start his own firm. Says Frank Baxter, chairman and CEO of Jefferies Group, who was introduced to Williams by a mutual friend, "He epitomized the values I look for in business partners. I was convinced that he could make me some money."

Williams set up a limited partnership even as naysayers warned him that leaving the hallowed corridors of Lehman Brothers was tantamount to career suicide. "A lot of people told me I was crazy and there was a point where I stood in front of the building and thought, `I won't be welcomed here anymore. I'm not part of this family anymore, and it's really the only workplace I've known,' "Williams recalls.

SHARING THE PIE

Given his success, the naysayers have been forced to eat their words. Repeatedly. In fact, last year Williams Capital announced that it had repurchased the final 19% ownership interest held by the Jefferies Group. Now it was a completely employee-owned firm. Williams had inserted a provision in the original partnership agreement that the firm could buy out the Jefferies' position by December 1998. After completing some extremely successful transactions, Williams Capital was able to buy its independence five months ahead of schedule. "Their business became so viable our investment was no longer necessary for them to achieve their goals," Baxter says.

Williams says the firm's new ownership structure should help boost the confidence that its corporate and public sector clients--including several state and local government pension funds--have in the firm. "There aren't many employee-owned firms out there. Most are the large public companies or have large majority shareholders," maintains Usher.

Having ownership in the hands of the employees also gives Williams a bargaining chip in attracting new employees and retaining key players. Says Williams, "Sharing ownership helps improve the commitment employees have to the firm and improves morale."

It also sets Williams apart from other black-owned investment banks that have capital partnerships with large majority institutions. Some African American-owned firms, such as Blaylock and Partners (No. 7 on the INVESTMENT BANK list of the BE FINANCIAL 50), which gets its capital from Bear Stearns, or Utendahl Capital Partners (No. 2 on the INVESTMENT BANK list of the BE FINANCIAL 50), which is partially owned by Merrill Lynch, have taken a lot of heat for having such support.

The latest evolution takes Williams Capital overseas. The company opened an office in London last fall to facilitate research and trading in the foreign equity market, and plans to have six full-time employees by the end of the year. The London office will serve as the hub of its international equity and fixed-income trading subsidiary, and make trades in markets throughout Europe, Asia and Africa.

In another groundbreaking move, Williams Capital completed the application process for membership on the New York Stock Exchange. At press time, the firm was expecting to lease a seat, which costs $250,000 a year or more. The move, which will make Williams Capital one of a handful of black firms to gain such membership in the past 26 years, will enable it to cut out the middlemen when making trades and increase its credibility and clout when dealing with major corporations. (See "Investment Bank Over-view," this issue.)

As Williams Capital forges ahead, the landscape of the securities industry continues to change. Banks and brokerage firms merge. Global outfits are in great demand. Small investments banks have to join forces or die.

Will Williams Capital ever be on the auction block? "As a trader, you must be open to being acquired," says Williams. And while he has had conversations with several firms, he has yet to see an offer that is too good to refuse.

For the present it seems like Williams will play the role of acquirer. He professes an interest in buying outfits that specialize in asset management, private placements and merger-and-acquisition consulting. All are ways to beef up the business.

From the brink of bankruptcy to full employee ownership and an international presence.

What's next for Williams Capital? Don't blink.

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