Canaccord Financial Inc. has wanted to expand to Asia for a decade as part of its plans to transform from a small Canadian boutique into a global firm, however the financial crisis forced the firm to put its plans on ice.
Canaccord was caught up in the asset-backed commercial paper situation and that problem put expansion on the back burner. Now that Canaccord is long clear of the ABCP mess, and has a lot of cash on the balance sheet, it's back in expansion mode.
China is hot, as a buyer of resource companies and as a creator of wealth. It's also also a big challenge for foreign firms, which have struggled to make an impact.
Canaccord is buying Balloch Group to get a ready-made China division, and partnering with the Export-Import Bank of China to get more deals and debt financing. (Read the original Globe story here.)
The firm is also tranferring three professionals of its own to China: Michael Deng, currently a special situations analyst focusing on China, who will become the firm's energy banker in China; Darian Yip, a mining banker; and Jeff Hagan, a San Francisco-based technology banker.
Why China? And why Balloch Group? Here's more from Paul Reynolds, Canaccord's chief executive officer, and Howard Balloch, head of Balloch Group, on the opportunity.
Many firms have tried to grow organically in China by hiring locals and transferring staff there. Why did Canaccord choose acquisition?
Paul Reynolds: "In China, like everywhere we've expanded, you need to have strong domestic partners on the ground with connections. In China, it's even more important that you have someone who understands the culture, that speaks the language, that has those connections, that people see as a local. Howard has all those things. He's got a very high reputation.
"In China, growing it organically for us just wouldn't have worked."
Mr. Balloch, why did you like Canaccord as a buyer?
Mr. Balloch. "We've probably done better than any boutique bank, but to really compete with the big companies, we needed to have a global reach. We needed to have networks of contacts and intelligence in the major resource markets."
"We were actively looking for a potential new partner. When Canaccord knocked on the door it was kind of perfect."
"This allows us to use connections with SOEs and major mining groups and major oil and gas groups to complement what Canaccord has to offer. It really is kind of a neat, nice fit."
Paul Reynolds: "To be truly a global business. When you look back at the whole business plan behind Canaccord going back to 1998 or 1999, our whole business plan was to expand internationally to differentiate ourselves from our Canadian competition, so first we went into the U.K., then into the U.S., to further differentiate ourselves. Our intention always was to go into Asia."
"We were very close around the financial crisis and we decided to pull our horns in a bit as we went through that period of time. We had our own difficulty, we wanted to come out of that and focus our attentions internally on our own business as we got through that very difficult time. Then the business came back and our own situation got better, and we again focused our attention on Asia."
"Asia really comes about because our clients are pushing us in that direction. When you look at the areas we're strong in -- we're very strong in mining in all three geographies that we do business in today, we're very strong in energy in all three geographies and we're very strong in sustainability in the U.S., and our largest franchise in the U.S. is our life sciences group."
"Balloch's business is very strong in all those businesses. It has very deep connections with businesses, the sovereign wealth funds, the SOEs [state-owned enterprises]and with emerging growth companies in all those sectors."
What about the EXIMbank relationship? How did that come about and what does that add?
Paul Reynolds: "EXIMbank came about through introductions we got through our introductions in China as we were looking for the right partner. They suggested having a partnership with us, which, after our due diligence, we decided would make a lot of sense."
"Having the ability to come up with debt solutions for clients that make sense for them, is something that will be very attractive to us and for the Export-Import Bank. They are going to introduce us to their clients who are looking to expand into Canada, the U.S. and the U.K. They're going to be working with us to sell our services to their clients."
From your perspective as a China veteran, Mr. Balloch, how key is EXIMbank?
"EXIMbank is very important. EXIMbank is one fo the two fundamental policy banks. They are extremely well connected, but they also have the capacity to bring preferential money to bear on projects. We're doing right now two projects outside of China with Chinese mining companies, both of whom are accessing EXIMbank financing. It's becoming an increasingly nimble organization."