The turmoil at First Union Corp. is putting new emphasis on returns from the company's capital markets group.
Part of the pressure is landing full force on David Knowlton, hired just four months ago from investment banking boutique Gleacher & Co.
Mr. Knowlton was brought in to run the private equity business of Bowles Hollowell Conner, a Charlotte, N.C.-based investment banking boutique founded by former presidential adviser Erskine Bowles in 1975 and acquired by First Union in April.
Mr. Knowlton heads a group of 30 that has specialized in getting middle- market companies the necessary financing for mergers and leveraged buyouts.
The money comes from some of the most powerful merger and acquisition funds on Wall Street: Kohlberg Kravis Roberts & Co., Hicks, Muse, Tate & Furst Inc., and the Blackstone Group LP.
Now Mr. Knowlton says he wants bigger clients and larger transactions. "Our aim is (to do deals in) the $1 billion to $2 billion range, as well as continuing to do those in the $150 million to $200 million range," he said.
To that end, Mr. Knowlton has recruited several high-powered Wall Street investment bankers, including Jeff Armstrong of Salomon Smith Barney; Dan Bumgardner of Chase Manhattan Bank; and Cliff Strain of Morgan Stanley Dean Witter & Co.
"We are very selectively hiring the top people" to manage relationships with some of the large Wall Street funds, he said.
With First Union's balance sheet, taking on bigger deals should not be a problem. The $230 billion-asset banking company has a roster of more than 20,000 corporate clients, which should provide plenty of leads for Mr. Knowlton and his group.
"There will be a tremendous increase in revenue opportunities by marrying relationships that we have with equity groups with those that our industry specialists have with First Union's corporate clients," Mr. Knowlton said.
The cross-pollination has yielded two deals. Mr. Knowlton's group seeks funding for a First Union corporate client that has a $1.4 billion syndicated loan that is lead-managed by the banking company and for a customer with a $750 million credit facility.
Over the last three to four years, First Union has committed more than $1 billion in private equity funds. Mr. Knowlton said the company is likely to place $300 million to $400 million of its own money in private equity this year.
In one example, before Mr. Knowlton came on board the private equity group introduced the management of Bristol, Pa.-based funeral services company Cornerstone Family Services Inc. to New York and Menlo Park, Calif.-based funders McCown DeLeeuw & Co.
Cornerstone was interested in making several acquisitions.
In addition, the banking company got Cornerstone a $200 million senior credit facility, and the capital markets group is scheduled to underwrite another $125 million in high-yield debt for the firm next month.
Such deals are especially important now, when First Union is under increasing pressure to improve earnings. After revising estimates downward twice in the last six months, First Union barely exceeded expectations for the second quarter.
Two weeks ago, president and chief operating officer John Georgius announced he would resign at yearend. He is to be succeeded by G. Kennedy Thompson, who has headed capital markets since 1996.
Mr. Thompson's appointment "shows the company realizes (capital markets) is a strength of theirs," said Katrina Blecher, an analyst at Brown Brothers Harriman & Co.
At a meeting with banking analysts in New York last week, First Union chief executive officer Edward Crutchfield said the company hopes to garner 50% of its revenue from securities-related businesses, up from 39% in 1998.
He and other company executives said First Union expects that capital markets revenue will grow 15% annually for the next three years, with a goal of reaching $4.7 billion by 2002.
That "will take some effort," said banking analyst Marni Pont O'Doherty of Keefe Bruyette & Woods.
Mr. Knowlton refused to discuss First Union's problems, saying only that "Crutchfield and Thompson are very dedicated to building the investment banking business."
Meanwhile, he has set lofty goals for the private equity group's performance for the next year.
The group ranked 14th for the first six months of 1999 in lead-managing leveraged-finance deals for sponsors such as KKR and the Blackstone Group, according to Loan Pricing Corp.
"You'll find us in the top five in the next 12 months," Mr. Knowlton said.