Strength to Stability

Starting up a securities firm, then surviving and prospering, is no cakewalk. The securities industry lives in a constant state of consolidation and litigation. That’s why the saga of Northland Securities, Inc., in Minneapolis merits continuing attention.

After navigating through a challenging passage, Northland is moving forward once again. Its unusual ownership structure—34 employees own 48 percent of the company and Minnesota billionaire Glen Taylor holds 45 percent—has emerged as a crucial asset.

(Two shareholders—Abdo Consulting, owned by Northland director Jay Abdo, and an unidentified investor—hold the other 7 percent.) Its strategy—strengthening its core competency in municipal bonds while at the same time diversifying into hedge funds and clean renewable energy bonds—is designed to help Northland morph into a full-service investment firm.

Since its birth in 2002, Northland has specialized in managing municipal bond issues from smaller units of government, many of them in Minnesota. Now the firm has stepped up to much larger bond deals. In November, it led its largest underwriting ever, a $54 million refunding for the North St. Paul–Maplewood–Oakdale School District. In January, the company topped its own record by leading a $93 million sale of new bonds for the Chaska School District. A few weeks later, Northland was listed, along with New York–based Goldman Sachs and four other comanagers, in a syndicate led by New York–based Bear, Stearns & Company to sell $511 million in revenue bonds to help finance construction of a new power plant in Nebraska.

The majority of Northland’s 109 employees work on the bond side, but that’s changing, too. In January, the firm boosted its equity operations to 14 staffers from six. Seven of the eight newcomers came from Miller Johnson Steichen Kinnard, Inc. (MJSK), a boutique investment firm which was purchased by St. Louis–based Stifel Financial late in 2006. A portion of MJSK’s institutional equity sales group, which was not included in that deal, decided to go to Northland instead of striking out on its own.

The move to Northland was a homecoming of sorts, because Northland’s founders and many of its employees came from MJSK earlier. “It’s been a very easy transition,” says Steve Austin, one of the new arrivals and now Northland’s director of institutional equity sales.

Northland now has five securities analysts, up from three before the influx from MJSK. This will enable the firm to double its research coverage to 60 companies by the end of the year, says Steve Denault, Northland’s senior research analyst.

There’s more. In January, Northland launched a hedge fund. Later this year, it plans to open its third Twin Cities office, in the western suburbs. The company also has offices in Pierre, South Dakota, and Sioux Center, Iowa. Northland’s bond specialists now are set to chase down an entirely new line of business: underwritings of clean renewable energy bonds, dubbed CREBs. The federal Energy Tax Incentive Act of 2005 authorized $800 million of these tax-credit bonds to finance certain renewable-energy and clean-coal facilities.

The Starting Lineup

Northland endured some rough waters early on. Less than a year after four ex-MJSKers founded the firm in September 2002, Northland had 76 employees, including 55 from MJSK. Then trouble came knocking. MJSK charged that Northland’s founders broke their employment agreements. In September 2004, a National Association of Securities Dealers (NASD) arbitration panel ordered Northland to pay $10 million to MJSK as a penalty for violating the NASD rule prohibiting raiding of employees. (NASD is an independent, private-sector regulator for U.S. broker-dealer and securities firms.)