Going head to head: black investment banks come up winners in direct competition with majority firms.
Since 1991, the San Francisco-based firm--No. 2 on the 1994 BE INVESTMENT BANK List--has worked and played hard with the right people, and built a public finance network exemplifying the maxim that to make money "you need to know who you need to know."
Last September, a multiracial group of roughly 130 attendees--which this year included the Oregon state treasurer, the director of Standard & Poor's municipal rating group and the CFO of Chicago's Metropolitan Pier & Expo Authority--met for three days from 7:30 a.m. to 12:30 p.m. to candidly discuss issues. The topics ranged from the financial adviser's role and financing capital programs to trends in derivative products to satisfy bond issuers and buyers (see "The Cutting Edge Challenge of Derivatives" sidebar). In the afternoon, attendees visited spas and vineyards or played tennis and golf on one of Silverado's two Robert Trent Jones courses. It's doubtful that deals were being cut, but these linkside chats often led to boardroom discussions.
Clearly, Grigsby Brandford wanted the assemblage to link Silverado's first-class status with the major-league expertise Grigsby Brandford brings to public finance issues. But during breaks, at meals and on fairways, another topic was on most lips.
What stirred such intense discussions? Business press articles that have criticized bond dealers for contributing to politicians who, in turn, select their firms as municipal bond underwriters. This practice has the appearance of "pay for play," enough so to have warranted criminal investigations. Although only major investment banks and no women- and minority-owned investment banks (WMIBs) had been accused of serious wrongdoing regarding the solicitation of bond deals, all attendees knew the drift. Many WMIBankers are big-time contributors, and women and minority political candidates will soon feel the brunt of these lost dollars.
The wheels were already in motion. Key organizations were cooperating to determine how to cleanse a soiled relationship: the Public Securities Association, which represents underwriters, traders and sellers of municipal securities; the Municipal Securities Rulemaking Board (MSRB), the industry's self-regulatory agency, and the Securities and Exchange Commission (SEC), which can ratify MSRB suggestions.
But Grigsby Brandford's CEO Calvin B. Grigsby did not wait for others to make rules about his business. He used Silverado as a backdrop to announce that Grigsby Brandford was instituting an indefinite ban on contributions to political candidates. One month later, the largest Wall Street firms followed suit.
Grigsby's pre-emptive strike typified the aggressive moves the largest black-owned investment banks made in 1993 when two of the top 15 firms each senior-managed more than $1.6 billion worth of deals. Prior to that, none of these banks had senior-managed even $1 billion worth. Last July, Grigsby Brandford beat out Goldman Sachs and Co. to lead-manage the largest municipal bond deal in Los Angeles history: a $503 million refinancing of the L.A. Convention and Exhibition Center. On the East Coast, WR Lazard & Co. (No. 4 on the 1994 BE INVESTMENT BANK LIST) made history by becoming the first minority investment bank to lead a sale of New York City debt to the public.
In 1993, the nation's 300 largest investment banks underwrote 13,529, or 99.9%, of all new long-term municipal issues, excluding private placements and nonprofit issues, worth $288.4 billion. Four black firms--Pryor, McClendon, Counts & Co. Inc. (PMC); M.R. Beal & Co.; Grigsby Brandford; and WR Lazard --were among the top 70 banks, leading 79 issues worth $4.38 billion.
But it would be a gross distortion to say black investment banks are only interested in public finance deals. Nearly all small or new investment banks were founded by individuals who learned their craft at larger and older ones. Last year, despite the historic institutionalized racism of mainstream investment banks (which still hire or train absurdly small numbers of blacks in corporate finance), several African-American-owned firms derived most of their income from either taxable fixed-income business or corporate-related business.
For example, last February, New York City-based Utendahl Capital Partners L.P. (No. 10 on the 1994 BE INVESTMENT BANK LIST) became the first minority firm to lead-manage a special type of mortgage-backed security deal called a REMIC for the Federal National Mortgage Association. Its value was $250 million. And New Jersey-based Sturdivant & Co. Inc. (SCI)--No. 12 on the 1994 BE INVESTMENT BANK LIST--says only 7% of its 1993 revenues came from municipal finance business, while the rest was derived from quantitative research, asset management and corporate underwriting.
The expansion of the fourth annual BE INVESTMENT BANK LIST, from 13 to 15 banks, recognizes this growing diversity. To be considered for the list, a firm must be at least 51% black-owned and have been in business at least one year. African-American-owned investment banks are marching inexorably from their expertise in municipal finance to respect in quasi-governmental business toward the goal of competing fully on the corporate finance playing field. It is only a matter of time.
NEW BARRIERS TO SHATTER
In 1993, three veteran banks and a relative newcomer showed that hot can get hotter. They were led by PMC, which had an MVP year vaulting over Grigsby Brandford to the top spot on the 1994 BE INVESTMENT BANK LIST. The company led all minority firms as "book running" senior manager, making 13 deals worth $1.665 billion. PMC ranked 15th among the nation's long-term municipal new issue underwriters, participating in 270 transactions totaling $36.3 billion.
PMC was "black-hot" last summer, senior-managing 12 municipal bond deals worth $1 billion. Its deals ranged from $6 million for facilities at Mississippi's Tougaloo College to the sale of $823 million worth of tax revenue bonds for the Pennsylvania Intergovernmental Cooperation Authority. In that deal, a Pennsylvania state authority hired PMC for the largest municipal sale ever led by a minority firm.
Raymond J. McClendon, PMC vice chairman, says these deals "show our depth and breadth as we develop a firm servicing a multiplicity of clients."
PMC has leapt into the future of black investment banking using public finance as a springboard. Between 1991 and 1993, the firm doubled in size to 60 professionals in 12 offices. Last year, managing directors were appointed in the public and structured finance areas as well as in sales management and trading and underwriting. At the same time, Raymond McClendon became COO, while President Allen Counts and CEO Malcolmn D. Pryor became co-heads of investment banking services.
There has been a lot to do since then. Last year, PMC's structured finance group--which deals in mortgage- and asset-backed securities--was chosen as sole placement agent for a Resolution Trust Corp. mortgage trust securitization. The capital markets group, which trades, underwrites and sells municipal bonds and U.S. government and mortgage-backed securities, traded more than $10 billion worth of taxable and tax-exempt fixed-income securities. The firm also began selling securities for federal agencies such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Student Loan Marketing Association (Sallie Mae). Now, boasts McClendon, PMC has the "good housekeeping seal in the taxable fixed-income areas of some of the largest markets in the world."
The firm's asset management affiliate, which complements PMC's trading expertise, also continued to grow. Wedgewood Capital Management Inc., which invests for institutional clients, has passed the $750 million mark.
Last year, PMC's keenest rival in public finance was Grigsby Brandford. In 1993, Securities Data Co. Inc. ranked Grigsby Brandford 29th among senior managers of long-term municipal new bonds, with 46 issues totaling $1.651 billion, and 18th among co-managers, with 233 issues worth $29 billion. To improve its average this year, the San Francisco firm acquired new skills to make it more competitive (see "Derivatives" sidebar).
Throughout the industry there are exciting examples of black-owned investment banks diversifying their services and their core business. Grigsby Brandford began as a firm specializing in lease financing. PMC added corporate finance and asset management to its public finance base. By contrast, New York City-based WR Lazard--the largest black money manager with $2.8 billion invested--is growing its financial advisory and municipal bond underwriting areas.
In 1993, the firm's broker-dealer arm, WR Lazard, Laidlaw & Mead, ranked 68th among senior managers of long-term municipal new issues doing six deals worth $492.4 million, and 17th among co-managers, with 176 issues worth $32 billion. The year's major deal occurred when the New York City Water Authority tapped WR Lazard to lead the sale of $375 million worth of its debt. This deal earned the firm about $130,000.
The selection did not surprise Kenneth Glover, WR Lazard's vice chairman. The firm had been the water authority's financial adviser for years, says Glover.
The belief that black investment banks only do municipal finance deals is further eroded at two-year-old Utendahl Capital Partners. In 1993, it opened Utendahl Capital Management, an asset management affiliate. The new firm, specializing in managing fixed-income portfolios for federal agencies, scored several coups. These included leading a Sallie Mae offering of $50 million in floating rate notes; joining the Federal Farm Credit Bank's bond selling group; and acting as co-lead manager in two Fannie Mae REMICS and two swap trusts worth more than $1 billion.
But doing more business wasn't the only change. Last year, former Utendahl Capital Partners executive vice president Ronald E. Blaylock, 34, left to found Blaylock & Partners L.P., his own investment bank specializing in taxable fixed-income securities. Blaylock says it was an opportunity not to be missed. True enough, and the young firm's financial credibility got an unspecified financial and credibility boost when Bear, Stearns signed on as a limited partner with no control of the business.
GOING THEIR OWN WAY
The fact that Sturdivant & Co. ranks 12th on the BE INVESTMENT BANK LIST doesn't faze its founders. The Clementon, N.J.-based firm's ranking was derived from the $1.7 billion in municipal issues it co-managed. But, for SCI, public finance is not the raison d'etre. It has been working since 1988 to create a niche as the largest minority-owned equity research firm, say Albert and Ralph A. Sturdivant, president and CEO of SCI, respectively.
In fact, 51% of SCI's revenue was derived from domestic and international research paid through brokerage trading in 1993; 30% from asset management; and 14% from corporate. underwriting. Only 7% came from municipal underwriting. "We are different [from other black firms] in that we provide a high level of investment research work to corporate management," Albert Sturdivant explains. "Companies want investment firms to understand their problems, their market and tell their story."
The companies investigated also end up contributing to SCI's asset management division. It has roughly $250 million invested in around 55 stocks for 17 institutional clients. To create that portfolio, SCI's 10 equity professionals use three proprietary screens to comb through 7,000 companies with capitalization of more than $500 million. This group is whittled down first to 600, then 150 and finally 60. Ralph Sturdivant says that SCI competes with larger investment research firms by being the first to discern a target company's hidden value.
The brothers must know their business. In 1993, SCI's total return on investment was 12.46%, versus 10.05% for the S&P 500.
INSTITUTIONAL RIGHTS, CONSTITUTIONAL WRONGS
This spring, the SEC approved two measures that will rip through the trillion dollar municipal bond market. First, it declared that municipalities and agencies selling bonds had to increase their financial reporting so that individual bond owners--who make up 75% of all bondholders--can make informed purchases.
Then, the SEC ratified the ban on "political contributions by municipal finance professionals and their supervisors to state and local officials or candidates for such office in jurisdictions where they currently do, or expect to do, municipal finance business." Last March, SEC chairman Arthur Levitt bluntly told a Public Securities Association meeting that such a ban would end "the perception and the practice of exerting political influence in the market."
On the surface, a ban affects all bond dealers equally. But at the Grigsby Brandford California summit last September, many WMIBankers and politicians predicted that a ban would retard female and minority financial and political power especially. And black firms wonder about the ban's impact on them. Increasingly, black firms are winning senior manager spots in negotiated bidding, and they are doing so not by favoritism but by their quality of service and quantitative skills.
Raymond McClendon of PMC says such sophistication gives his firm the capacity to do well regardless of a ban. But the ban still bothers him because, he says, it "is a violation of my constitutional rights. Let's not be naive and say that my participation [in the securities industry] has always been a part of the political process."
Fact: All politicians seek money from people they know. Minority candidates gravitate to WMIBankers because they have money. Under a ban, not only does much of this funding evaporate, but also white candidates face nothing comparable. Why not? Their fund-raisers canvass the nearly lily-white, mostly male corporate finance corridors of the largest investment banks. To equalize the situation, Kenneth Glover of WR Lazard says corporate money should be banned too because, he contends, "If [contributions] are buying business on one side, they are buying business on the other."
The dichotomy also bothers Alphonso Tindall. The chairman of the National Association of Securities Professionals--a trade group of minorities and women in securities--condemns illegal or unethical activities, but sees a threat in the ban. Tindall, who is also a partner at the New York City law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, says if municipal financiers can't assist them, candidates will find it hard to raise enough funds to compete. He adds that the gains of minorities and females in finance are linked to their counterparts in office, and "to suggest that this phenomenon is a result of improprieties, rather than the fact that people tend to reach out to people who are similar rather than those who are different, is preposterous."
One person with an insider perspective is Rodney Ellis. The co-founder and director of Houston-based Apex Securities Inc. (No. 9 on BE INVESTMENT BANK LIST) is also an elected Texas state senator. Under the ban, his firm is thus prohibited from doing business with any Texas municipality. He says black politicians in other states have told him that, in response to the ban, they will be more vigilant in searching for qualified minorities and will pressure the securities industry to adopt affirmative action codes to hire women and minorities as co-managers.
Another banker from a leading firm recommends that all municipal business be awarded on a competitive basis, when there are no unique market conditions, and urges the SEC to create a national standard for the process.
Some steps have been taken. Last March SEC chairman Levitt told the major securities firms they should include WMIBs in competitive underwriting syndicates. But some WMIBs say that does not go far enough. They say municipalities should upgrade WMIB opportunities to lead bond deals. The SEC chairman should publicly urge major securities houses to joint-venture with black firms on the corporate side. And Levitt--a former American Stock Exchange chairman--must urge the mainstream investment community to tear down the walls of institutional racism and sexism that keep minorities and women out of corporate finance.
Calvin Grigsby has a surprising final thought on the subject. He is convinced the white-owned firms will gain little new municipal business at WMIB expense. He reasons that, not only have WMIBs gained expertise in public finance, but also "the myth is that minority firms were getting business on political contributions when in reality the major firms were using them [contributions] as their basic entree into a market. I think minority-owned and regional firms will do even better now," says Grigsby, "and they will bring other minority- and women-owned firms into deals with them."
Who knows, perhaps the major linkside discussion at the 1994 Silverado conference will be how black-owned investment banks not only used new techniques to expand their franchise, but how they beat the big firms at their own game.
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|Title Annotation:||Black Enterprise Top 15 Investment Banks; includes related articles on investment banking terminology and the value of financial derivatives|
|Article Type:||Cover Story|
|Date:||Jun 1, 1994|
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