The tough get going.

WHEN WARDELL R. LAZARD, FOUNDER AND managing principal of WR Lazard & Co., died unexpectedly in May last year, many predicted that his untimely death would be his company's demise.

His death could not have come at a worse time. Wall Street won't quickly forget 1994, which goes on record as the worst fixed-income bond market in more than 20 years.

As the year unfolded, shell-shocked investment bankers saw year-end bonuses slashed by more than half from the previous year. The market rout was marked by the closing of Kidder, Peabody, which had been crippled by a U.S. Treasury bond trading scandal. Other firms such as Goldman, Sachs and Merrill Lynch announced huge layoffs.

Meanwhile, state and local governments continued to be pinched by economic woes, and 40% fewer municipal bonds were issued. Declining profit margins in public or municipal finance, a sector particularly important to African-American-owned firms, prompted the departures of CS First Boston and Donaldson Lufkin & Jenrette Securities from that aspect of the business.

If that wasn't enough, firms engaged in public finance also had to grapple with new restrictions, such as the increased scrutiny of market practices by federal regulators, a ban on political campaign contributions and calls to disclose more information to potential investors.

The political landscape was particularly perilous for African-American-owned firms. A wave of conservative Republicans won elections nationwide and immediately began questioning the validity of set-aside and affirmative-action programs.

Among black-owned investment banks, Daniels & Bell watched its revenues dwindle, leaving the firm unable to make payments to lease the New York Stock Exchange seat that its founder, the late Travers J. Bell Sr., once owned. It closed its doors in December, ending an era of black investment bank participation on the stock exchange.

Many feared that WR Lazard would suffer a similar fate. Wardell Lazard was generally seen as the firm's rainmaker. Rumors flew that his wife, Betty Lazard, who became the majority shareholder, would quickly sell all or part of the investment bank she'd helped her husband create in 1985.

But Lazard surprised many with her decision not to sell the company. Instead, she and the firm's managers quickly implemented a strategic plan that had been drawn up in 1993 naming two key officers as co-chief executives: Melvin A. Eubanks and Kenneth E. Glover. The firm also announced plans to give all key employees an opportunity to own stock in the company. And as vice chairperson, Betty Lazard continues to actively service client accounts and participate in new business development.

"We repositioned WR Lazard in our key businesses to provide better, and in some cases, additional services to all our clients," says Glover.

When 1994 came to a close, WR Lazard (No. 3 on the 1995 BE INVESTMENT BANK list) had strengthened its balance sheet by paying down $3 million in debt, and reported its fourth profitable year in a row.

Like WR Lazard, most of the nation's top black-owned investment banks were able to meet the extreme challenges of 1994. But the fallout from last year is transforming the industry landscape for many black-owned investment banks. Some are adapting to the changes by blazing new trails.

GOING GLOBAL

Diversifying into international securities markets is one path that some are taking. Pryor, McClendon, Counts & Co. Inc. (No. 2 on the 1995 BE INVESTMENT BANK list) is one of the most active firms internationally. Last year, PMC was the only black-owned investment bank to participate in a $750 million note financing for South Africa. Goldman, Sachs was the lead manager of the offering, which included such other international heavy hitters as Swiss Bank Corp., Nomura Securities, Deutsche Bank AG London and Morgan Stanley.

In addition, PMC's international finance team, headed up by PMC Chairman and CEO Malcolmn D. Pryor, agreed last year to serve as a trade and investment advisor to the Eastern and Southern African Trade and Development Bank. The bank provides funds in 22 African countries for trade and project finance (financing for highways and schools).

PMC also has stakes in several African financial institutions merchant banks, including Ghana's CAL Merchant Bank, the National Merchant Bank of Zimbabwe and Securities Discount Co., a Ghanaian firm that has a wholly owned stock brokerage operation. PMC also is an investor in the African Export-Import Bank, which became operational last year.

"Diversification has been the watch-word for the firm for some time," says Raymond J. McClendon, PMC's vice chairman and chief operating officer. "We worked to diversify our revenue stream in 1993, and it paid off in 1994."

Grigsby Brandford & Co. (No. 1 on the 1995 BE INVESTMENT BANK list) is also expanding its international involvements, and is now negotiating with a government commission in China. If the company wins the contract, it will assist China in establishing a market for fixed-income securities, says Calvin B. Grigsby, CEO. To finance expansion and infrastructure improvements, the Chinese government has depended primarily on sales of minority equity interests in government-owned businesses rather than on selling debt, Grigsby says.

A first step toward developing a fixed-income debt market would be the expansion of a legal system capable of enforcing the necessary regulations, Grigsby explains. "We thought we could use some of the public finance techniques used in the U.S., [but] we quickly found out it won't work because they don't have the necessary legal system."

In South Africa, Grigsby Brandford is negotiating with two venture capital firms to serve as the primary underwriter for a private placement, rather than trading the securities on an exchange, of mortgage-backed securities to U.S. investors. The capital raised will be used to finance a government-backed, single-family home construction program. Grigsby Brandford is also working with local South African developers on short-term financing for another construction program.

"The most difficult thing about doing business in another country is the financial and political risk," Grigsby says. "You have to develop a comfort level in case of a default."

APEX SECURITIES

Doing business with Mexico is a natural for Apex Securities Inc., located in Houston. But Apex has put its plans for Mexico on hold as a result of the outburst of political and economic instability there. Instead, the firm is aggressively pushing ahead with plans for investment in Ghana, said President and CEO Richard Ramirez.

Apex (No. 6 on the 1995 BE INVESTMENT BANK list) is seeking to serve as a financial advisor to the Ghanaian government. It plans to help Ghana attract private U.S. investors to buy government-owned industries, such as banks and energy and telecommunications companies. "Ghana is strategic," says Ramirez. "It's viewed as the gateway into west Africa."

DOWNTURN

The 1994 rout of the bond market was especially difficult for black-owned firms, which saw their standings falter. Last year, three black-owned investment banks--Grigsby Brandford, PMC and Lazard--were among the top 100 senior managers of municipal bond deals, working alone or overseeing investment bank syndicates, which underwrote 70 deals totaling $883.4 million. But only one of the firms, Grigsby Brandford, was among the top 50 senior managers of long-term municipal bond issues, placing 44th.

In 1993, two African-American-owned firms ranked among the top 50 lead underwriters, placing 27th and 29th.

"There's been a downturn in public finance," Grigsby says, "but it may not be a downturn for us." He points out that several large Wall Street firms have pulled out of the municipal finance business, reducing competition. "It gives us a chance to obtain a bigger piece of the pie," notes Grigsby.

As a result, the firm is continuing to build on its existing relationships with municipal issuers, touting its full range of investment banking services including a derivatives affiliate.

"We think 1995 will be our best year ever," says Napoleon Brandford III, vice chairman. Brandford expects that the firm will manage about $2 billion worth of public finance deals in 1995, up from the $508 million in long-term municipal deals it senior-managed in 1994. Senior or lead managers manage the deals, set the terms and decide how the securities will be distributed for sale. And they make most of the money.

In February, Grigsby Brandford senior-managed a $300 million financing for the Texas Public Finance Agency. It's the largest senior-managed deal the firm has done in the state, and the largest Texas deal handled there by a firm other than a major Wall Street investment bank, Brandford says.

Grigsby Brandford acknowledges that profit margins in public finance are slimmer than those in other areas of investment banking, such as corporate finance or government agency deals. But its strategy is to increase revenues by doing more senior-managed deals. Little money can be made as a co-manager in the current market because underwriting spreads are usually so slim.

"How can you make it if you're a co-manager?" Brandford asks. "If you can't be a senior manager, you can't be in business."

PMC also continues to pursue public finance business. Last fall, the U.S. Department of Education named PMC the designated bonding authority for the agency's $375 million capital financing program for historically black colleges and universities (HBCUs).

In that role, PMC will issue bonds backed by the U.S. government and make loans to creditworthy institutions to finance their capital improvement programs. PMC created a wholly owned subsidiary to administer the program, the Educational Direct Loan Marketing Corp., or Eddie Mac. McClendon expects to begin making Eddie Mac loans to colleges this summer.

PMC also worked on building up its existing client relationships last year. The firm lead-managed a $33 million Phoenix bond issue and was the first minority-owned firm to do so. The deal was not one of PMC's largest, but it illustrates how the company built on its relationship with Phoenix, where it's been participating in bond offerings for five years.

"Phoenix [doesn't have] a large black population," says C. Courtney Knight, managing director of PMC's public finance department. "[Our] philosophy is to develop long-term relationships with issuers that lead to growth for the firm."

PMC is determined to increase revenues by "cross selling" such additional services as asset and pension fund management, equity sales and trading services to its existing base of public finance clients. "We're taking a more comprehensive approach," McClendon says.

WR Lazard will continue to gain a significant portion of its revenues from public finance, Glover says. The vice-chairman notes that the firm's broker-dealer subsidiary, WR Lazard Laidlaw & Mead, added more clients to its roster in the second half of the year than it had in the two previous years combined.

The subsidiary led a $148 million offering for the New York State Local Government Assistance Corp., and was a co-senior manager on New York State's sale of more than $500 million of general obligation bonds (obligations backed by the full faith and credit of a state or local government) earlier this year. The firm also reemphasized its financial advisory business, and recently added to its roster the City of Los Angeles, California's Alameda Corridor Project and Prince George's County in Maryland.

On the taxable side, WR Lazard served as a financial advisor to the Resolution Trust Corp., the quasi-government agency that takes the assets of failed savings and loans and sells them.

Glover, like Grigsby, says that with "the dropping out of some key players, we will move up in market share just by default."

To increase profits, WR Lazard is honing in on taxable industrial development revenue bond deals, where profit margins are greater than those on straight tax-exempt public finance deals. On the taxable side, you can earn 75% or 150% more than on a similar tax exempt deal," Glover says.

For example, WR Lazard earned about half as much on an $8 million taxable Pittsburgh deal it did in 1994 as it earned on a $375 million tax exempt New York City Municipal Water Finance Authority deal that it led in 1993.

No wonder Glover prefers taxable public finance deals. Participating in high-profile deals may boost your credibility, but not necessarily your profitability, Glover says.

Gaining expertise in municipal taxable project financings will serve as a natural entry for WR Lazard into corporate finance, Glover predicts. Eventually, some of the small corporations that issue taxable municipal bonds will grow and want to take their company public.

NEW KID ON THE BLOCK

Two years ago, Ronald E. Blaylock left another black-owned investment bank, Utendahl Capital Partners L.P., to form his own: Blaylock & Partners L.P. (No. 7 on the 1995 BE INVESTMENT BANK list). Blaylock specializes in taxable, fixed-income securities.

When Blaylock opened its doors, Bear Stearns & Co. had signed on as a limited partner, bringing Blaylock's capital to over $20 million. And as the new kid on the block, Blaylock hit the ground with guns blazing. For its first deal, in early 1994, the firm was the sole manager for a $500 million Federal National Mortgage Association mortgage-backed security, called a REMIC.

"It was our deal," Blaylock says of the transaction. "We did it ourselves in our first week of business, and the deal was profitable." Since then, Blaylock & Partners has served as a co-manager on a $1.1 billion commercial mortgage-backed transaction for the RTC, and as sole manager of a $90 million Fannie Mae strip REMIC. The firm, which started out with Blaylock and one temporary employee, now has a staff of 25.

Like Blaylock, Utendahl Capital Partners L.P. (No. 5 on the 1995 BE INVESTMENT BANK list) also focuses solely on taxable deals. In 1994, the firm ranked 12th among all investment banks that led or co-managed mortgage-backed securities underwritings. According to Securities Data Co., it worked on transactions totaling $4.3 billion. In addition, Utendahl participated in $950 million worth of debt issues. The firm ranked 17th as a senior manager on deals totaling $981.9 million.

Utendahl's asset management affiliate, Utendahl Capital Management L.P., oversees the investments of $150 million for corporate clients. Determined to conquer every aspect of the investment banking industry, black-owned investment banks continue to chip away at the barriers that have kept them from playing significant roles in the corporate finance markets.

PMC is negotiating with one of the minority-owned participants in the Federal Communications Commission's auction of airwave licenses. Because of lawsuits and congressional opposition to preferential treatment to minorities, it's doubtful that the auction will take place. But if it does, McClendon says the firm expects to raise $20 million via a private placement. This will help the minority bidder finance its purchase of a wireless communications license.

Meanwhile, the firm's structured finance group was also the sole placement agent for an $800 million RTC transaction last year.

LOOKING AHEAD

For the most part, black-owned investment banks tightened their belts and streamlined costs in 1994, but unlike their majority-owned counterparts, virtually none of the firms experienced widespread layoffs.

For some firms, the resolve not to abandon areas such as public finance was born of necessity. "We've all had to tighten our belts," says PMC's McClendon. "But we are not exiting the [public finance] market because we want to illustrate to our clients that we will be there through thick and thin. If we had a great corporate finance base, some of us might have [decided] to exit."

But the problems may spur changes in the composition of the black-owned investment banking scene. "We are going to have to consolidate," McClendon explains. "I think it's inevitable in order to generate a deeper capital base, enable us to bid on more transactions and attract more people."

McClendon says the ego factor had kept some black-owned investment banks from consolidating in the past. "I'd rather have 30% of a greater profit base than 100% of a small and declining profit base. We need to be corporate entrepreneurs and take a broader perspective in order to go from [being] small entrepreneurs to major corporate players. There is no option, if you're going to grow."

Glover of WR Lazard concurs. "We [minority-owned firms] don't offer enough products by ourselves, and we're getting into a commodities business" in which clients want a range of products and services. Glover adds that he is interested in growing WR Lazard's

asset management business by moving into areas where there aren't many other minority-owned firms. He'd like to acquire another firm to do this. To start up a new line of business from scratch is just like we never existed before. So you want to get somebody who's already in the business."