Some booms on Bay Street end with a bang. Both the dot-com bubble and the income-trust bonanza disappeared in a flash. Others fade like dying empires.
For Canada’s independent investment banks, it’s been the latter.
Canada had 78 independent dealers focusing on institutional clients in 2011, at the height of the commodity supercycle; now it has 61. So the news that GMP Capital is selling its capital markets arm to Stifel Financial Corp., an American rival with more scale, shouldn’t be all that surprising. Yet the deal carries extra significance, because, for nearly two decades, GMP had the clout that few firms could rival – and the swagger many competitors would kill for.
Emerging out of the ashes of Gordon Capital, GMP earned a reputation for its eat-what-you-kill environment. Partners, who also owned the dealer, got a cut of profits in their annual compensation, and at its peak in 2006, GMP was worth nearly $2-billion.
Thirteen years later, not even GMP could carry on in its current form. Its sale is bound to dim the hope some smaller competitors have held on to.
What did GMP and so many of its rivals in? Across the industry, there’s been a trifecta of body blows over the past decade. There was the demise of superstar traders and portfolio managers in favour of electronic platforms; the rise of compliance costs and regulations in the wake of the global financial crisis; and, of course, the never-ending resource rout.
For all the energy GMP had, the reality is the dealer profited off an incredible commodity boom. “We hit at the right time in ’95," said Mike Wekerle, GMP’s former star trader who left the firm in 2011.
As resource stocks gaining popularity, there was real need for strong independent boutiques to serve hundreds of small companies that were hungry for capital. The big banks, meanwhile, were often too risk-averse to touch them.
A decade later, when GMP hit its peak valuation in 2006, its investment banking arm brought in $80-million in mining revenues and $72-million in oil and gas revenue. Combined, they made up 77 per cent of the investment banking total.
By 2018, mining investment banking had revenues of only $14-million, while energy brought in $23-million.
Across the industry, the mining drought has been particularly tough on independent dealers – something that is often overlooked of late because the Canadian oil and gas price crash is more recent, and is continuing. “Of all the markets, the mining exploration market goes no-bid until [investor] sentiment comes back,” said Peter Brown, the founder of Canaccord Financial, one of GMP’s top rivals that was best-known for funding Howe Street mining companies in Vancouver.
GMP also suffered as equity trading was disrupted. The dealer was arguably best-known for its trading desk, led by Mr. Wekerle, who had close relationships with fund managers such as Frank Mersch, who was at Altamira and then Front Street Capital, and Rohit Sehgal, who was at Dynamic Funds. These managers would make large lead orders in deals that GMP underwrote, and that gave the dealer confidence it wouldn’t be stuck with huge liabilities if their offerings didn’t sell.
In return, the fund managers would get stock in the deals they were most interested in. Sometimes, GMP would even take shares of underperforming companies they no longer wanted to own off of their hands and then find a buyer for them.
Fund managers hold much less sway today. That’s partly because low-cost exchange-traded funds are gaining popularity, but it’s also because many resource fund companies, such as Sprott Asset Management, posted horrible returns after the commodity supercycle went bust in 2011 and 2012.
Finally, independent dealers are struggling with rising compliance and anti-money laundering costs. Large money managers, such as banks, can spreads the millions of dollars of costs over their entire revenue pool; smaller shops can’t. “The margins have just disappeared,” Mr. Brown said.
Of course, GMP itself made some mistakes. Starting in 2010, the dealer went on a global expansion, moving into different sectors and different countries, such as the United States, Britain and Australia, and also acquiring fixed-income dealer Miller Tabak Roberts Securities in 2011 for US$44-million.
In the end, none of these brought major revenue streams. In fact, last December, GMP sold the fixed-income business, ending its near-decade of international expansion.
“The structure of an eat-what-you-kill, no salary environment, with a very low employee headcount, kept variable costs very low," Mr. Wekerle explained. The acquisitions, though, boosted the cost base.
GMP isn’t the only sizable independent that has suffered. In March, Macquarie Capital Markets Canada announced it was shutting down all of its sales, trading and research operations, leaving behind a small advisory and asset and divestiture practice.
What has changed for the dealer, though, is the number of options available for a Hail Mary. In 2016, GMP acquired Calgary boutique FirstEnergy for $98.6-million, hoping the combination would offer some respite from the storm. Last year, GMP cut 10 per cent of the staff from its Canadian capital-markets business – many of whom were from the Calgary office.
Even more telling, Stifel Financial said Monday it would pay $70-million for GMP’s capital markets business – a fraction of what GMP paid for FirstEnergy to begin with.
With reports from Niall McGee and Jeff Jones
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