Boutique investment dealers defying risk-averse Canadian culture

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Impressed by strong results from a growing number of U.S. boutique investment dealers, Canadians are finally showing the courage to launch equivalent firms on this side of the border.

In the U.S., small advisory shops such as Centerview Partners and Moelis & Company keep winning major mandates, stealing deal flow that traditionally would have gone to bulge bracket investment banks. Historically, Canadians were thought to be too timid to launch their own because the big bank-owned dealers have so much clout here – the country is only so big and these large institutions have their hands in so many deals.

Yet new boutique advisory firms are starting to crop up in Canada, flying in the face of our risk-averse culture. Each hopes to carve out its own market niche. Late last year Verus Partners, which specializes in large-cap, cross-border mergers and acquisitions advice, opened up shop on Bay Street; in April, INFOR Financial Group opened its doors, offering advice for mergers, restructurings and derivative hedging strategies.

Canada has a long history with independent firms, and many of them were acquired by banks in the 1980s. More recently, popular independent dealers – some of which were also acquired – have included Newcrest Capital, Canaccord Genuity and FirstEnergy.

However, the burgeoning boutiques offer a much more refined business model than the older independents. While the veteran dealers were largely built around sales and trading, particularly for commodities, the new firms are small, focused advisory shops that offer very specific advice.

"CEOs want a safe, trusted, confidential environment," Brian Hanson, who runs Verus, said. A former co-head of mergers and acquisitions at UBS Securities LLC in New York City, he did his due diligence before launching the new firm and found that business leaders are looking for a sounding board. In the old days, boards of directors were able to play this role, but lately they are more focused on governance and risk issues.

Despite the strategic rationale, it still takes guts to venture out on your own – and that is something very un-Canadian in capital markets. The big banks pay well, and they offer a safety net of sorts. At a boutique adviser, the partners can't rely on corporate lending relationships to help bring in underwriting and advisory mandates; they have only their advice to stand on.

But Mr. Hanson was lucky enough to have worked at a boutique dealer in the nineties, so he had some experience with the structure. And lately he's seen people he used to work with at American investment banks find success with the model. "I watched them set up their firms and realized there's no one doing this at the high end [in Canada]. There's a gaping hole."

It's much easier to launch such a dealer today. "When we started this business 10 years ago," Morrison Park Advisors co-founder Brent Walker said, "we'd get blank looks from people." MPA is one of the few boutique, advisory-driven dealers that have been successful, lasting through many market waves. A key to its strength: the business model isn't commodity-oriented, nor is it centred on sales and trading.

Still, MPA had to learn just how hard it is to branch out. "There are a lot of aspects of owning your own shop that are messy and difficult," Mr. Walker explained. Splitting up the fees is particularly tough; most people on Bay Street would rather not sit down and hash it out as a group.

MPA has made it work, though, advising on roughly 85 deals over its 10-year run. And it encourages new firms to start up.

But it is realistic about the perseverance required. "When you start your own shop, everyone will take a meeting with you," co-founder Dave Santangeli said. "But how many second meetings, and third meetings?"