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Australia’s largest investment bank, Macquarie Group Ltd., spent $350-million over more than a decade building a brokerage house that was intended to be a force in Canadian capital markets.

On Monday, Macquarie’s leaders recognized all their efforts created a domestic dealer suited to fighting the last war, a dubious strategy in both business and combat. In Canada, Macquarie fielded more than 50 equity-sales, trading and research professionals, all trained to sell stories to portfolio managers. As more and more funds take a passive investment approach, buying securities based on an algorithm, Macquarie realized it didn’t need an expensive team to pitch stocks to computers.

After two years finishing outside the top 20 Canadian dealers in equity league tables, a standard measure of market prowess, Macquarie pulled the plug Monday on its entire 50-plus-employee Canadian institutional-equity platform. The restructuring should be a wake up call to both small-cap Canadian companies, which traditionally look to independent dealers for capital, and the entire investment-banking community. In equity markets, fighting the last war means losing the current fight for business.

Macquarie, and most other dealers, used to view their institutional-sales desks as a primary point of contact with clients. If a mining company needed $100-million to dig a pit or acquire a rival, a banker drafted a prospectus, an analyst wrote a report, the sales team pitched the idea to fund managers and traders moved the stock. Stricter regulations around roles within dealers and the rise of trading technology revolutionized the industry.

Now, small-cap companies that want to raise both capital and awareness need to step up their own investor-relations efforts, across websites and social media, and ensure their bankers are wired into an increasingly small community of active institutional investors.

And today, the most profitable shops on Bay Street are advisory boutiques such as Infor Financial Group and Maxit Capital, firms staffed entirely by investment bankers, with no equity desks. At the other extreme are the bank-owned dealers, which have scaled back their equity-sales and research teams in recent years, and foreign-based investment banks, which house a handful of dealmakers in Canada, backed by trading desks outside the country. That’s the model Macquarie is now embracing.

There are only a handful of dealers left in the middle ground here – independent houses with significant equity sales, trading and research teams. There’s Raymond James Ltd., which looks to analysts to support significant Canadian wealth-management businesses, and the likes of Cannacord Genuity Group Inc., GMP Capital Inc. and Eight Capital.

The recent boom in financing cannabis companies boosted the fortunes of many independent brokerages houses, but Macquarie was never a factor in underwriting pot producers. Longer term, these dealers face the same challenges in the institutional-equity markets that drove the Australians out of the sector.

Consolidation around the strongest firms is expected to be a continuing theme in domestic investment banking, with experts at the Investment Industry Association of Canada (IIAC) predicting a sector that has 161 firms will soon be home to approximately 100.

In a recent report, IIAC chief executive Ian Russell said, “We anticipate even more firms to leave the business in 2019, given the ratcheting up in operating costs and prospect of an extended period of depressed market conditions and decelerating growth in retail and investment banking revenues.”

IIAC’s statistics show profits from equity trading at 60 Canadian institutional firms, including Macquarie, fell by 49 per cent last year, to $157-million.

Mr. Russell said current industry trends “will lead to a significant consolidation in the investment industry with the corresponding damaging impact on the competitive diversity in the domestic retail marketplace and capital-raising for small- and mid-sized businesses in public and private markets.”

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