Research Push for Williams Capital.(News)

Byline: Paul Burton, Investment Dealers' Digest

Williams Capital, a firm best known for its work in debt markets, has expanded into equity research in the hopes of filling a void left by some large investment banks that are allocating fewer resources to the coverage of publicly traded companies.

The six-analyst team, which operates under the name Williams Capital Research, began tracking industrial, consumer, media, life sciences and paper and packing companies for clients last month. The firm plans to double the number of equity research specialists this year.

"One area in which we were lacking was proprietary, fundamental research," said Christopher Williams, the firm's founder, president and chief executive, who cut his teeth working with fixed-income securities and debt capital markets at Lehman Brothers before striking out on his own. "To find value for our clients, we needed to put in an in-house research team."

While some firms have pulled back from equity research, others like Nomura Securities have bolstered their research teams. In a report published last year, JPMorgan Cazenove predicted that fixed-income revenue, which accounted for just over half of investment banks' revenue last year, would drop 22% that year. The report also predicted that underwriting stocks for companies and making markets in equities will become more important sources of income for investment banks.

Williams Capital has been eyeing an expansion into equity research for "quite some time," its founder said. "Many of our clients who enjoy our trading [services] tell us, 'It'd be great if you could do more quality research.' "

The New York firm, which has roughly 80 employees and a client count "in the hundreds," according to Williams, expanded its equities trading operation in April 2009, when it acquired the institutional assets of Nutmeg Securities of Westport, Conn. The deal brought 12 equities traders to Williams Capital. (The firm also acquired a majority interest in Nutmeg's retail brokerage operation, which retained the Nutmeg Securities name.)

The industrywide buildup in equities research reflects a desire by clients to get research and other brokerage services for their commission money. Sanford Bragg, the president and CEO of Integrity Research Associates of New York, said some brokerages "are looking to expand their research offerings to protect their commission flows."

The 17-year-old Williams Capital, one of the largest minority-owned investment banks in the United States, is a private firm; its founder would not provide financial details, except to say it gets more than half its revenue from equities-related work.

Jack Murphy and Suling Lew, each of whom has more than 20 years of industry experience, are co-directors of the research team. Murphy, who has held senior roles at CJ Lawrence, Deutsche Bank, Raymond James and Soleil Securities, said the team's goal is to have 10 to 12 analysts by year's end. "We're more interested in adding the right people, but we think we can add value by the second quarter and, by the end of the year, realize significant growth."

Lew has worked for Williams Capital for 10 years. She previously was a director at UBS Warburg and a vice president in institutional sales at Schroeders & Co.

The six analysts who joined Williams Capital last month are Marc Riddick, who tracks the consumer sector; Brian Bolan, who covers Internet companies; Matthew Coppola, who follows media businesses; Harry Russell, who tracks life sciences and biotechnology companies; Joseph Naya, who follows the paper, packaging and industrial sectors; and Rick Nelson, who is involved with special situations that are not confined to a specific industry sector. Nelson "can look at spinoffs, mergers, special dividends and undervalued situations," said Murphy. "It is like a free safety in football."

The analysts have worked at such large and small firms as Lehman Brothers, CJI Capital Markets, Morgan Stanley, Atlantis Investment and UBS. "As a small firm, we have to offer quality research for our clients," said Matthew Rochlin, Williams Capital's vice chairman and senior executive vice president, who joined the firm through the Nutmeg deal.

Williams Capital's CEO warned that the firm must move carefully. To date, client feedback has been positive, "but we're still working through an appropriate strategy," Williams said. "Bear in mind that each analyst is still in the process of initiating coverage. We don't really have a good barometer yet of how we're doing in the eyes of the customer."

Some Wall Street firms have built up their research teams and invested in their equity businesses, but others have closed their doors altogether, and some large banks have cut back their services. From May through August of last year, 12 research firms closed their doors, and eight others merged with others, according to Integrity Research; victims included Grindstone Research, Alpha Strategies and Spelman Research Associates.

"From the perspective of the banks, P&L is the function of the commissions," Bragg said. "Banks tend to cut back on services." Murphy said his firm has "heard from a lot of analysts looking for positions - not just from firms that folded, but from some of the bigger firms, as well."

The Nutmeg deal marked a breakthrough in equities for Williams Capital, partly because it brought aboard Rochlin, Nutmeg's co-founder, president and CEO. "One of the main attractions for us was Chris Williams' commitment to grow and expand the firm," he said. "They were known more for their banking and fixed income and a growing equity business, and that really represented a great fit for us, as we were 100% equities."

Williams said he and Rochlin looked long and hard to make sure overlap between their firms was not a problem.

"There were some good complementary things about Nutmeg - corporate buybacks, new issues and access to senior management. They also brought a strong focus on cost containment," Williams said.

"Matt has a number of industry relationships. One thing Nutmeg had in the past was a strong focus. Matt was good at identifying new technologies for trading and looking at ways to make us more efficient in areas like trading costs."

Williams Capital targeted six sectors when it introduced its equities research team, but the firm's managers consider themselves "sector agnostic" as far as which of those sectors gets expanded first. And even though the firm has made a big push into equities, it is still very much involved with fixed income, specifically municipal finance.

Last year, it launched a municipal division, which it saw as a complement to its fixed-income sales and trading platform. This week, it hired Joseph Fichera as a senior adviser to the firm.

Fichera founded the advisory firm Saber Partners 10 years ago and will remain its CEO and senior managing director. He has an extensive background in municipal finance. He has advised the Securities and Exchange Commission on municipal finance issues, and he has advised the California governor's office and the West Virginia Public Service Commission. Fichera has also worked with corporations such as Texas Instruments and Dow Corning.

"The firm will expand its presence in the municipal finance area," Fichera said, and he expects to advise Williams Capital on a broad range of securities and market initiatives, including mergers and acquisitions.

Last year, Williams Capital was one of 12 small broker-dealers that worked with Morgan Stanley on the Treasury Department's sale of Citigroup common stock. It has worked with the Federal Reserve Board on its Term Asset-Backed Securities Loan Facility, and Goldman Sachs selected Williams Capital last year to manage $1 billion of Treasury and government agency securities.

The Goldman assignment was important for Williams Capital, because it boosted assets under management and could attract other investors. (Some prospective investors require managers to have a minimum of assets under management.)

Williams Capital traces its roots to 1992, when Christopher Williams set up a Jefferies & Co. division that worked with derivatives business - one of his specialties at Lehman Brothers. When he launched Williams Capital two years later, Jefferies contributed startup money and became a minority investor. William Capital bought out Jefferies' last stake in 1998.

"A lot of minority-owned firms start out in public finance, then start doing corporates. Williams Capital began doing corporate work, then beefed up in public finance starting last year," said one industry observer, who asked not to be identified.

Williams called 1994 "one of our most stressful and least profitable years." That year, the Fed raised short-term interest rates four times in as many months; that surprised many market participants and hurt Williams Capital's derivatives business. In addition, the rapid rise in interest rates soured investments for several local governments; Orange County, Calif., went bankrupt, largely because of its investments in derivatives.

"Derivatives became a bad word," Williams said.

The first-year experience toughened him. "Probably the best year to start out for a firm is a very lean year, because you focus on cost containment," he said. "We keep our real estate costs down. I don't need a palatial office."

His firm began to underwrite bonds and equities, and two years later, Colgate-Palmolive hired Williams Capital as an underwriter. In 2002, it was named a co-manager of an $11 billion benchmark note for Fannie Mae.

The firm has been involved in underwritings for companies like AT&T and Wal-Mart Stores.

As the CEO of one of the most successful U.S. minority-owned firms - Black Enterprise has ranked it the No. 1 minority-owned investment bank five of the last six years - Williams has earned many accolades, but he said the firm has also began to draw praise for the quality of its work. "There have been times when we've earned recognition on a stand-alone basis. We don't walk in and say we're going to execute as a minority business. We say we're going to execute as a business and compete."

His firm has plans to expand further, but he struck a cautionary note. "We will continue to identify opportunities and continue to grow, but we will be extremely cautious about the way we develop. There is a great deal of uncertainty in the world-just look at the Middle East. Europe hasn't rectified all its problems, either; you just don't see them in the headlines. And the recovery in the U.S. isn't clear cut."