The topic of most financial conversations changed in early February. Suddenly, all that investors were talking about was subprime lending. The shift came on the heels of announcements by HSBC Holdings and New Century Financial, two of the nations largest providers of loans to home buyers with poor credit, that their bad-debt charges would be substantially higher than had been forecast. Subprime lending hasnt faded from the headlines since and its unlikely anytime soon, though concerns appear to be waning that the problems in the subprime sector could spread.
The stage for the current situation was set, in part, in 2006, when Wall Street was just getting to know new Federal Reserve Chairman Ben Bernanke. The Dow Jones industrial average jumped 16.3%, the SP 500 rose 13.6%, and the Nasdaq composite index increased 9.5%. One might think those gains meant growth for all financial services firms, but investors gambling on riskier investments hurt some firms, such as Ariel Capital Management (No. 2 on the BE ASSET MANAGERS list with $16.1 billion in assets under management), whose long-term approach avoids riskier strategies. Assets under management fell by $3 billion and revenues dropped 18%, making last year one of the firms toughest since the early 1990s.
It was a difficult year because many people looked at their investments on a short-term basis, says John W. Rogers Jr., Ariels chairman and CEO. Several institutional clients shifted money from high-quality stocks into more aggressive, riskier equities, such as those from energy, housing, and other cyclical industries. But since the Fed stopped its barrage of interest rate hikes in August, Rogers says the firm is realizing outstanding performance relative to its benchmark.
Last year, the stock market was propelled by strong corporate profits, relatively low unemployment, and merging economies, says Will Retzer, senior analyst at SNL Financial, a financial information research firm based in Charlottesville, Virginia. The bond market was also bullish, notes Retzerthe yield on the benchmark 30-year Treasury note gained more than 6% for the year.
These days, all financial services firms, not just those that are black-owned, must look at new ways to develop revenue sources, add customers, and nimbly adapt to change while gracefully retaining existing customers. But black-owned banks, investment banks, private equity firms, and asset managers face additional pressures while competing in an unforgiving economic environment. For instance, black-owned banks face greater competition from the nations largest banks and from online financial firms, such as HSBC Direct and ING Direct, which attract customers by offering higher interest rates.
Banks: New Opportunities
Assets at the 25 African American-owned depository institutions on the BE BANKS list increased 7.4% to more than $5.7 billion, and deposits rose 6.9% to more than $4.6 billion last year from 2005, according to the Federal Deposit Insurance Corp.
U.S. banks, including those that are black-owned, faced several challenges last year, including tighter net interest marginsthe percentage difference between what banks earn on loans and what they pay on deposits; the slowdown in mortgage lending; and rising delinquencies on existing loans, says Buddy Howard, banking analyst and president of Equity Research Services Inc. in Raleigh, North Carolina.
Adapting to the changing business climate, Milwaukee-based Legacy Bank (No. 13 on the BE BANKS LIST with $160.8 million in assets), founded in 1999 by three African American women, increased assets by nearly 31%. The growth occurred as total lending rose 36%, to $145.7 million, primarily from an increase in loans to small businesses and commercial real estate developers.
Legacy provided a $10 million loan to Wisconsin Energy Corp. to build power plants. That was a big deal for us because we were never able to compete before with the big banks in Milwaukee for a project of that size, says President and CEO Deloris Sims.
In 2004, Legacy and the Wisconsin Housing and Economic Development Authority joined forces to apply for funds under a federal program, New Markets Tax Credits, which offers tax breaks to investors who finance business projects in low-income areas. The program helped spark a 23% increase in deposits. Whats more, the alliance helped boost the banks profits last year by nearly $443,000, to $1.25 million, as the effect of the tax breaks began to be felt. In a time when interest rates were rising and reducing our net interest margin, notes Sims, the New Market Tax Credits allowed us to gain additional fee income and helped boost our bottom line.
Competition also increased in cyberspace when OneUnited Bank (No. 2 on the BE BANKS list with $650.4 million in assets), launched an Internet presence in February 2006 that accounted for some of the $42 million in deposit growth at the Boston-based bank. CEO Kevin Cohee says that the Internet branch has succeeded chiefly because of its annual percentage yield of 5.3%, which is higher than what most competitors offer.
Investment Banks: Healthy Results
The strong stock market helped some black-owned investment banks grow their businesses. Managed issues for BE investment banks increased by more than 18% last year. Among those helped by the market was Cleveland-based SBK-Brooks Investment Corp. (No. 9 on the BE INVESTMENT BANKS list with $14.6 billion in total managed issues), which increased its total managed issues by some 22% in 2006. CEO Eric Small says additional underwriting work for several of the top 500 publicly traded companies more than offset a flat year in the municipal bond market.
Similar gains were posted at The Williams Capital Group L.P. (No. 1 on the BE INVESTMENT BANKS list with $142.4 billion in total managed issues). The New York City-based firm saw a 47% climb in its dollar volume of total managed issues. The firm led or co-managed nearly 100 debt transactions, up 32% from 2005; fixed-income underwriting experienced the greatest growth and accounted for about 55% of total revenue. It was a year of progress, but theres still substantial room for improvement, says CEO Christopher J. Williams.
It was also a strong year for Chicago-based Loop Capital Markets L.L.C (No. 2 on the BE INVESTMENT BANKS list with 124.8 billion in total managed issues). Growth resulted from expanding services to existing clients and from adding new clients. The greatest challenge for all African American-owned investment banks, says CEO James Reynolds Jr., is convincing clients that we have the ability to manage large, complex assignments, which are typically reserved for longer-standing Wall Street investment banks. It is these types of mandates that are essential to our growth.
Asset Managers: Mixed Results
Assets under management increased by 4.4% for the BE asset managers. Among those on the plus side is RhumbLine Advisers (No. 3 on the BE ASSET MANAGERS list with $15.9 billion in assets under management), based in Boston. The firms assets under management increased by nearly $3.8 billion because of substantial inflows and a healthy stock market. CEO J.D. Nelson notes that nearly $2 billion came from 25 existing clients, with assets mainly in pension funds, endowments, and foundations; the remaining $1.8 billion came from new clients and was invested primarily in the firms index-based stock and bond funds.
Utendahl Capital Management (No. 6 on the BE ASSET MANAGERS list with $2.6 billion in assets under management), which specializes in fixed-income asset management for institutional investors, added about $600 million to its assets under management. Chairman John Utendahl says the firm sold a wider variety of investment productsincluding a money market mutual fund and short duration productsto a greater number of major corporations.
But the year proved far more challenging for Chicago-based Holland Capital Management (No. 9 on the BE ASSET MANAGERS list with $2.2 bil
lion in assets under management), which saw an $800 million decline among its portfolios. Founding partner Louis A. Holland saw institutional investors increasingly choose index funds, rather than actively managed funds, and alternative investments, such as real estate or emerging international markets. But Holland is optimistic: We expect that our conservative growth style will regain favor in the market this year.
Private Equity: Hope and Challenges
Last year, private equity acquisitions of U.S. companies set a record, totaling some $420 billion from $129 billion in 2005, says Matthew Toole, an analyst at Thomson Financial, because of merger and acquisition activity worldwide in the first quarter. Hot sectors include retail, consumer products, energy and power, healthcare, media and entertainment, and high technology. Collective capital under management increased 13.2% for the BE private equity firms. Meanwhile, Toole notes that investors will be watching closely how future deals are financed.
According to Toole, most of the recent private equity deals have been financed by high-yield debt, and the health of the credit market will determine the terms of credit. If interest rates rise and investors require higher coupons (higher interest rates on the bond), it will become more expensive to issue the debt and more difficult for private equity buyers to acquire companies. If that happens, we could see a marked slowdown in private equity acquisitions this year, Toole says.
New York City-based ICV Capital Partners (No. 3 on the BE PRIVATE EQUITY FIRMS list with $440 million in capital under management) is now primed with a second private equity fund of $313 million to invest in smaller middle-market companies in the consumer products, food, manufacturing, and healthcare industries.
Managing Director Willie Woods says the climate for private equity firms offers both hope and challenges. The environment is promising because investors are out in droves looking for investment opportunities with newer funds and emerging managers. But he points out that mega buyout funds run by the likes of Kohlberg, Kravis Roberts Co. and the Blackstone Groupwhich recently filed for its own IPOare real hurdles. Theyre sucking up a lot of the capital, and its difficult to get airtime if youre small.
Indeed, that is the greatest challenge facing black-owned private equity firms: to increase the capital that institutions, including pension funds, invest in them, says Robert L. Greene, president of the National Association of Investment Companies. He says minority-owned firms manage less than 2%or about $8 billionof the private equity capital in the United States. Black private equity firms continue to do a great job with the resources they have, Greene observes. However, until significantly more capital is made available for them to invest, it will be difficult for them to compete for the larger deals.
BEs first report on black financial institutions noted the rapid growth of banks, savings and loan associations, and insurance companies controlled by African Americans. In 1973, 37 banks, 44 thrifts, and 42 insurers were the primary source of loans, mortgages, and life insurance for blacks. The past 35 years have brought sweeping structural and regulatory changes, leading to the consolidation of institutions and creating one-stop financial supermarkets. As a result, black banks now compete against majority-owned financial monoliths, thrift institutions have disappeared, and black insurers have been reduced to four major players: North Carolina Mutual Life Insurance Co., Golden State Mutual Life, Atlanta Life Insurance Co., and Williams-Progressive Life Accident Insurance Co.
[Financial Services Eligibility]
B.E. Banks
These are commercial banks or savings and loans that are classified by the Federal Reserve as black institutions and have been fully operational for the previous calendar year. An institutions financial status is measured in terms of total assets, capital, deposits, and loans, including mortgage-backed securities for the calendar year. In compiling our list of the leading 25 institutions, we received surveys from black-owned institutions and consulted the Federal Reserve, state banking commissions, and industry associations.
B.E. Investment Banks
An investment bank must be at least 51% black-owned and have been fully operational for the previous calendar year. The 10 investment banks on our list engage in activities such as underwriting, initial public offerings (IPOs), mergers and
B.E. Asset Managers
An asset management firm must be at least 51% black-owned and have been fully operational for the previous calendar year. The 15 firms on our list include those that invest financial assets for individuals and institutions such as pension funds of government agencies and corporations and the endowments of colleges and universities. (Asset managers that specialize in real estate and other types of investment vehicles or operate hedge funds are not eligible for inclusion on this years list.) A firms financial status is measured in terms of total dollar amount of managed assets derived from equities, fixed-income and tax-exempt investments, and cash for the calendar year. In addition to receiving surveys from these companies, we consulted federal and state regulatory agencies and industry associations. All firms on our list must be registered with the Securities and Exchange Commission (SEC) and have filed their annual assets under management with the SEC at the time of publication. The rankings of these firms are based on total assets under management for the previous calendar year that have been verified by the SEC.
B.E. Private Equity Firms
A private equity firm must be at least 51% black-owned and have been fully operational for the previous calendar year. The 10 firms on our list include those that manage funds making equity investments in, and/or providing financing for, operating entities, including startup firms, established companies, and private equity firms or private equity partnerships that invest in operating companies. (Private equity firms that specialize in real estate investments are not eligible for inclusion on this years list.) These investments are made on behalf of the firm and its individual and institutional investors. A firms financial status is measured in terms of total managed capital for the calendar year. Additional information provided to BE includes a firms total number of funds as well as its portfolio of companies or private equity partnerships. In addition to receiving surveys from these companies, we consulted regulatory agencies and industry associations.
As indicated, BE consulted industry analysts and other sources to verify the information contained in the lists. Companies that may have previously appeared on the BE 100S but have been excluded this year are either no longer black-owned or their financial status has dropped below the minimum threshold to make the lists.