go, so we started carving out that niche and building relationships over time.” Building that side of the business required a lot of “hard core going out and calling on folks, asking for an opportunity and bringing them ideas,” Chapman emphasizes. Having the ability to back a deal was only part of the equation.
When Eric Small took over Brooks Securities in 1994 to form the S. B. K. Brooks Investment Co. (No. 10 on the 1996 BE INVESTMENT COMPANIES list), he already had the advantage of having forged relationship on the corporate side, acquired over 15 years as a consultant at Arthur D. Little and as investment manager for Aetna. At the time, Brooks had minimal brokerage activity, and focused instead on municipal finance, which accounted for 80% of the business. But rising interest rates and the default of municipal bonds in Orange County, California, persuaded Small and his two partners to craft a for-ward-thinking strategy. They immediately set out to strengthen their institutional trade execution, which at the time represented about 20% of their business. Last year, they also complemented their institutional equity brokerage by hiring one of the most experienced equity analysts in the country to head up their research unit.
Wallace says such moves help smaller firms move toward becoming fully integrated investment houses. “Research is a very big area because even the most sophisticated investors need information and analysis.” Offering clients more than a single service gives a firm a better chance of retaining that client, while receiving additional revenue as it meets more of the client’s needs.
Ernest G. Green, managing director at Lehman Brothers in Washington, D.C., advises firms to look at emerging markets, such as Africa, the Far East, Mexico, Latin America and other countries that are privatizing state-owned assets. Firms can use skills developing municipal bond deals in the American marketplace in order to win public works deals abroad. And black-owned firms should not limit themselves to African nations. “There may be more opportunities for minorities in Singapore or Eastern Europe than in South Africa,” Green counsels. He also suggests diversifying into areas such as derivatives and financing for the privatization of government assets.
The conventional wisdom is that the municipal bond market will turn bullish again, but investment firms would be wise to continue to diversify. The market will be dominated by fewer, bigger players, competition will remain intense and profits and margins will not be as large as before.
“Minority firms that find a way to grow separate streams of revenue will be better positioned to survive,” asserts Wallace. “Target your niche in the market and go after it aggressively. Try to be the inventor or the innovator.”