The financial crisis opened doors of opportunity to many smaller firms last year, and minority-owned broker-dealers were no exception. In fact, they may be the textbook example.
Last year minority- and women-owned firms ran the books on 200 deals worth $17.7 billion, a 76% increase in volume compared to the $10 billion volume in 2008, according to Thomson Reuters. Compared to 2007, the percentage gain is 92%.
In terms of total market share, minority- and women-owned firms senior managed 2.1% of all transactions in 2007, 2.6% in 2008, and 4.3% last year. For stimulus-related bonds, such firms senior managed 6.0% of all deals, and their participation rate, which includes serving as co-manager, was 18.3%.
The deals in question are also getting larger. The top five transactions led by minority firms last year ranged from $508 million to $1.3 billion, whereas in 2004 the range was $263 million to $300 million, and in 2000 $75 million to $335 million, according to Thomson Reuters. Even the 10th-largest deal senior managed by a minority firm in 2009, at $427 million, was far bigger than the largest transaction in 2004.
For each year of the last decade Siebert Brandford Shank & Co. was the top minority-owned underwriter. Last year it senior managed 39 deals worth $5.9 billion, versus 32 deals worth $3.5 billion a year before.
Suzanne Shank, president of the firm, said the goal is to be in the top 10 nationally among all underwriters. A few years ago that would have seemed a bit far-fetched — it was ranked 26th in 2005 — but the dream is looking increasingly plausible given recent growth. Last year Siebert ranked 12th nationally.
Siebert was the seventh-largest underwriter for transportation deals in 2009, eighth-largest for stimulus-related bonds, and fourth-largest for airports, according to Thomson Reuters. Regionally, Siebert was ranked 10th in the Northeast, 11th in the Southwest, 14th in the Far West, 23rd in the Midwest, and 37th in the Southeast.
In March 2008 the firm completed its biggest transaction to date, a $1.75 billion general obligation bond for California. Earlier this month, Siebert also senior managed Chicago’s $770 million GO deal, a complex transaction split into four series of tax-exempt and taxable new-money and refunding bonds, Build America Bonds, and recovery zone economic development bonds.
The opportunity to work on bigger issues has provided experience and name recognition. It also helped to make minority-owned firms a “tried-and-true kind of entity” among issuers that previously may have been predisposed to working only with the largest banks, according to Shank.
“Not only has the sky not fallen, but also we’ve been able to demonstrate very good execution both on the structuring side and the distribution side, so customers feel more and more comfortable with engaging minority-owned firms to do these large deals,” she said.
Dislocations in the financial sector allowed the firm to expand its staff by a third as it picked up experienced bankers from larger institutions that began to retrench or pull out of public finance.
“Most of the larger minority-owned firms, including ourselves, dramatically increased our staffing with the onset of the financial crisis,” Shank said. “We made the investment immediately. As soon as I saw UBS pull out of the business, I was on the phone trying to attract some of the talented bankers from that shop.”
Loop Capital Markets in 2009 won the second spot among minority-owned underwriters for the third straight year. The Chicago-based firm’s business volume increased 35% in 2009 as it led 33 deals totaling $3.3 billion, versus 19 deals worth $2.5 billion the year before.
Loop also aims to be a top-10 firm in national rankings, and with its recent growth spurt that too could be a possibility. In 2009 it expanded its staff of public finance bankers to 35 from 15, and many of the hires came directly from the bulge-bracket firms. Increased staff helped the firm rank 16th last year, up from 20th in 2008 and 30th in 2005.
“Loop has enjoyed a significant amount of success over the last few years,” said managing director Chris Mier. “Not unlike other non-Wall Street firms, Loop has benefited from the industry dislocation — we added to our staff very talented individuals from some of the large firms that got caught up in the crisis.”
The firm’s most recent hire is Alexander Rorke, a former manager of public finance at UBS Securities who now leads the municipal banking group.
E. J. De La Rosa & Co., an investment bank solely focused on California, ranked third among minority-owned firms. De La Rosa’s 23 bankers senior managed 48 deals worth $2.9 billion, ranking it 20th nationally and eighth in the Golden State.
“The first thing you learn in business school is to be number one in your market — to focus on your market and not to spread yourself too thin — so we’ve never had any interest in being number 15 in four different markets,” said Edward De La Rosa, president of the firm.
De La Rosa’s business volume nearly quadrupled in the utilities sector to $861 million last year, while transportation volume increased 140% to $484 million.
The firm’s public finance team doubled from late 2006 to the end of 2009, which De La Rosa attributes to “being at the right place and in the right position” when the financial crisis upended the market.
“I think all of California’s muni market could see that when other firms were pulling their capital and their people out of the market, we just continued to do what we’ve been doing for the past 18 years. That’s been our secret,” De La Rosa said.
In addition to absorbing new staff from larger banks, minority firms have also benefited from policies designed to encourage diversity among the workforce that does business with public entities.
In Illinois, for instance, there has been an informal mandate since 1989 that 30% of all municipal transactions should use minority-owned underwriters and bond counsel, according to Brian King, formerly a debt manager for Chicago who now heads public finance at Cabrera Capital Markets, which senior managed $534 million last year on seven issues.
King said the city’s approach results in economic development at no cost to the taxpayer.
“The way Chicago looks at it is that they aren’t spending more on what they pay their investment banks — they pay the same as everybody else — but they are encouraging the development of new businesses in the city,” he said. “They are being an incubator, providing start-up funds for small businesses in the city and the result is that small businesses are really taking off here.”
Minority firms participated in 25.8% of all transactions in Illinois, by volume, in the decade, compared with 13.3% in New York and 14.2% in California, according to Thomson Reuters.
New York Gov. David Paterson in 2008 launched an effort to catch up. He created the Minority and Women-Owned Business Enterprise task force, which by the end of the year implemented new request for proposal guidelines. The results show a clear impact.
In 2007, minority- and women-owned firms were senior underwriters on $1.5 billion of transactions in the state, representing 4.8% of all deals. Just two years later they led on $4.2 billion of deals, a 9.5% market share. As co-managers, participation among minority firms jumped to 22.4% from 14.2% in the same period, according to Thomson Reuters.
“The task force adopted a set of best practices designed to remove artificial barriers that unintentionally blocked minority firms from doing business with the authorities that issue state debt,” Marc Violette, spokesman for the Dormitory Authority of the State of New York, said in an e-mail statement.
The new rules allow the public issuer to require that an underwriter partner with a minority-owned business. They also allow competing underwriters to list prior transactions from out of state, and grant authorities the ability to change an underwriter’s position within a syndicate.
“It was past practice to do business with underwriting firms that had experience doing deals with New York debt-issuing entities,” Violette said. “This automatically locked out a lot of firms — minority firms especially — that had experience doing big deals in other jurisdictions like Illinois, Georgia, and California, but not in New York.”
Many minority-owned businesses describe the guidelines as “leveling the playing field” for small- and mid-size underwriters.
“They have given qualified firms an opportunity to compete based on experience, track record, and innovative ideas,” said Sam Ramirez Jr., director of Samuel Ramirez & Co., the fourth-largest minority-owned firm. Last year Ramirez ran the books on 22 issues amounting to $2.7 billion, a sevenfold increase from 2008.
Even smaller firms not directly affected by the new criteria are hopeful that increased awareness of minority firms will benefit their business.
One example is Oakland-based Blaylock Robert Van LLC, which co-managed 17 deals worth $535 million last year. Chief executive officer Eric Van Standifer said Paterson’s criteria has played a role in the firm’s confidence.
“We’re still only getting a fingernail’s portions of the business,” he added. “But it’s clear around the country that these municipalities are going to have to be more aggressive in raising capital themselves, and we think that there’s an opportunity for us to play a senior role in a whole slew of transactions.”
Blaylock acquired Ohio-based SBK Brooks Investment Corp. in August, and in the last year has hired two public finance veterans and opened a Chicago office. In addition, he said the firm is in the process of forming an alliance with Jamaica-based Capital and Credit Financial Group.
Even with the right policies, firms won’t be able to expand unless they have a strong capital base to draw on, but in today’s climate some issuers are casting a less trusting eye on balance sheets and instead focusing on other factors where smaller firms claim they excel.
“The bulge-bracket firms historically competed upon the basis of having a big balance sheet that was made available to the client. When the financial crisis hit, however, the balance sheet was not available to the clients in their time of need,” Mier said. “We think that the industry will increasingly compete on the basis of timely, high-quality service rather than the dubious offer of a balance sheet that is only there for the client in good times.”
“No longer is bigger, better,” added Stan Grayson, chief operating officer of New York City-based M.R. Beal & Co., which was the fifth-largest minority-owned firm last year, leading on seven issues worth $1.3 billion.
“My view has always been that capital is a bit of red herring,” he said. “There’s no question that some capital is required, but in most municipal transactions we have the ability to pre-sell bond issues, so by the time a deal is priced, there’s usually very little or none of the issue that’s unsold.”
Even for larger deals, holding a large capital base isn’t always necessary, as often there is a syndicate of underwriters to share the risk and give confidence to the issuer, according to De La Rosa.
“All syndicate members will stand in for their proportionate share of the unsold bonds of any member that doesn’t meet its commitment,” he said. “So what happens when you do some of these larger deals is that the issuer has access to the combined capital of the all those five or six firms, regardless of who the senior is.”
De La Rosa said capital played an important role in his firm’s recent growth, but that it’s only one part of the formula. Equally important are building rapport with investors, possessing the ability to deliver retail orders, and demonstrating leadership within a syndicate.
“Capital is a part of it,” he said, “but capital doesn’t do you any good if you don’t have those other attributes.”
In the end, the most important factor is execution.
“No firm is hired as senior manager because it’s minority-owned, we’re hired because we can structure and distribute the bonds,” Shank said. “Issuers are accountable to taxpayers, so firms have to deliver. It’s all about relationships, and it’s all about performance.”
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