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GMP Capital Inc.'s Kevin Sullivan, left, and Harris Fricker during an interview with The Globe and Mail in Toronto Tuesday, August 24, 2010. Independents such as GMP Capital Inc., Canaccord Genuity Group Inc. and FirstEnergy Capital Corp. have struggled to make money for many years.Darren Calabrese/The Globe and Mail

Signs of carnage in Canada's bifurcated capital markets are cropping up again, casting an even bigger shadow over the futures of independent dealers. All the more worrying: They have come back despite blockbuster underwriting fees.

Although independents such as GMP Capital Inc., Canaccord Genuity Group Inc. and FirstEnergy Capital Corp. have struggled to make money for many years, there is a new round of worries, prompted by new losses and layoffs.

Despite this surfeit of fees stemming from the flurry of underwriting activity, particularly in oil and gas, FirstEnergy laid off 12 per cent of its staff earlier this month. GMP, which is also heavily tied to resources, reports its latest set of earnings Thursday morning, and the expectation is that they will be weak – again.

"The trend in domestic investment banking activity in the past few years has really been one of the 'haves' and 'have-nots,' " said Sumit Malhotra, a financial services analyst at Scotia Capital.

Energy companies that raised money, for instance, have mostly awarded underwriting positions to banks that lent them money, leaving little for the independents. As well, small-to-mid-capitalization companies that independents historically advised have barely been active in these markets.

The bank-owned dealers have had their own hiccups. Bank of Montreal's capital markets arm just laid off roughly 50 people, and Bank of Nova Scotia made similar cuts over the past six months. But the new round of questions has mostly put venerable independents that are publicly traded in the spotlight.

GMP

Once heralded as a leading independent, GMP has suffered since the metals and mining supercycle crashed in 2012. The dealer lost money in three of the past eight quarters – including a sizable $6.9-million loss during the most recent reporting period.

The dealer faces widespread uncertainty because its revenues are now heavily weighted to resources after Neil Selfe, a leading investment banker who focused on non-resource sectors such as financial services and technology, left in March to start his own independent dealer.

GMP has also spent heavily to build out a Houston office that will focus on energy deals, but now the oil and gas market is in rough shape. An investment of this nature also often includes guaranteed payments in order to recruit staff, meaning there will likely be substantial costs to cover for the next few years.

This investment is also only one part of a strategy employed by current chief executive officer Harris Fricker to double down on resources – all of which came just before the resource market tumbled. This initiative included adding staff in Australia and Britain and bulking up to add expertise in high-yield debt for resource companies.

Although GMP still has the power to generate non-resource revenue – it is the lead underwriter on the new initial public offering for Stingray Digital Media Group, for instance – multiple sources have stressed there is discontent within the firm because the future is so uncertain. GMP did not reply to a request for comment.

Canaccord

Canaccord spent the past few years focused on diversifying its business. Progress has arguably been slow – resources still accounted for 47 per cent of revenue over the past three fiscal years – but the dealer now earns sizable fees from sectors such as health care and life sciences, as well as technology.

Canaccord also acquired Collins Stewart Wealth Management, a wealth manager in the U.K., for $400-million in 2011. The dealer now has $20-billion worth of wealth assets under administration in the U.K. and Europe – and that figure is expected to rise as the firm acquires more wealth managers.

Still, the strategy hasn't protected Canaccord from continuing woes. The stock has almost halved from its peak last summer, and earlier this year, 80 people were laid off, largely in the U.K. and the U.S., as the dealer unveiled a strategic realignment.

The big question mark now centres on succession planning following the death of former CEO Paul Reynolds earlier this month.

David Kassie, the former head of Genuity Capital Markets, which was acquired by Canaccord in 2010, is currently leading the firm – prompting speculation of a reverse takeover of sorts.

However, Mr. Kassie has only been named as an interim leader. Canaccord declined to comment, saying that more details will be made available when it next reports earnings. On Bay Street, the speculated front-runners to take over include Dan Daviau, currently the head of North American capital markets, and Alexis de Rosnay, who runs the European arm.

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