GMP Capital Inc.'s former CEO Kevin Sullivan, left, and income CEO and current president Harris Fricker.Darren Calabrese
GMP Capital Inc. shareholders ought to be pleased to see that the firm is done with its detour into alternative asset management, which cost investors in the company a lot of money.
GMP's decision to sell its portion of hedge fund manager GMP Investment Management to Fiera Capital basically closes a very expensive chapter, and shrinks GMP closer to its roots as an investment banking and trading house. (GMP is keeping only a small equity long-short fund and two managers who will run it.) The alternatives business was a strategy designed to give GMP a wider offering of products to attract high net worth clients. Want to take your company public? We can do that. Want to invest your profits in our private equity fund or hedge fund? We can do that too.
So just under seven years ago, GMP got into alternative assets by buying private equity firm EdgeStone Capital for $152.5-million. At the time, GMP chief executive officer Kevin Sullivan called it "an exceptional fit with GMP."
The next year, in late 2007, GMP announced the creation of a hedge fund business, with the same rationale.
But EdgeStone proved to be a bust, leading to huge writeoffs of about $82-million for GMP, which has since abandoned the private equity business.
The hedge fund business has done significantly better, reaching about $600-million in assets and booking nice returns on trades such as the purchase of restructured asset-backed commercial paper. But it never became a really meaningful source of profits or value for GMP. In the first three months of 2012, GMP reported a pre-tax loss of roughly $1.2-million from the business. Now, after five years in the business, GMP is getting roughly $11-million from Fiera for its part of the hedge fund operation.
That's a nice cheque, but it pales in comparison to the losses on EdgeStone.
GMP's current CEO Harris Fricker is cutting away distractions and excess costs in hopes of having a lean GMP with few fixed costs for when the company's core business of investment banking takes off again.
The firm recently finished a strategic review that resulted in some back office savings. Now, with the investment management experiment largely done, there isn't much left to do except wait for a rebound.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)