Jefferies beefs up investment banking in Canada

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Jefferies Securities Inc. is wading further into the Canadian capital markets pool.

The Canadian outpost of the mid-sized U.S. boutique investment bank has won regulatory approval to lead initial public offerings (IPOs) for Canadian companies and participate in secondary stock issues.

The firm was recently granted a licence to underwrite by the Investment Industry Regulatory Organization of Canada (IIROC).

While the IPO market has been moribund for the best part of a year, the secondary financing environment has been robust. Secondaries are up 20 per cent year-to-date to $26-billion, according to Bloomberg data, with a handful of billion dollar-plus offerings hitting the market. Fees on such issues typically range from 4 to 5 per cent, meaning tens of millions of dollars are up for grabs.

"Canada is an important market for us," Steven Latimer, Canadian head of investment banking with Jefferies Securities, wrote in an e-mail to The Globe and Mail.

"Coupled with our existing high yield, lending and M&A [mergers and acquisitions] capabilities for Canadian clients, Jefferies is now positioned to deliver the full range of capital markets and advisory solutions."

Jefferies has no plans to add any new positions at this point in Canada, meaning institutional sales and research staff who deal with Canadian clients will be based in the United States and internationally. The decision not to build a big physical presence in this country is not a surprise. Despite having an, at times, large M&A footprint in Canada, Jefferies has always had a minimal on-the-ground presence, with a skeleton staff working out of Brookfield Place in Toronto. The broker's minimalist approach has similarities with those of other U.S. and global investment banks that operate in Canada and specialize in cross-border M&A, like Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse.

David Fleck, a partner with Delaney Capital and former head of Macquarie Capital Markets Canada Ltd., refers to it as the "briefcase model" – expertise flown in when needed.

"Jefferies is actually doing it in an even more cautious way – which is basically to hire no one [new] here, and just do it out of New York," he said in an interview.

"I'm not sure how successful that [will be]," he added.

"You have to develop some relationships here – I mean, some."

Breaking into the secondary financing market in Canada will not be easy for Jefferies in an environment dominated by the big Canadian bank-owned dealers. While it offers high-yield debt financing, Jefferies does not extend traditional credit to issuers, in the vein of an RBC Dominion Securities or a CIBC World Markets. That means Jefferies will face a competitive disadvantage similar to what many Canadian boutiques, such as GMP Capital, Canaccord Genuity Group Inc. and Cormark Securities Inc., grapple with every time they go head-to-head with a bank to win underwriting business.

Sector-wise, Jefferies is known for its resource practice in the United States, but it also has a solid footing in industrials, financial services, health care, technology, media and telecom (TMT), particularly in the mid-market arena. Over time, Jefferies will be hoping to carve out a niche selling its U.S. product into the Canadian market. E.g., should it lead an IPO in the United States, such stock could be offered to Canadian investors too.

When Jefferies first entered M&A in Canada, it did so with a bang. In its first year of operation (2012), it finished in 11th place in the league tables that rank banks by M&A, according to Bloomberg data. Among its mandates was being named an adviser (alongside Goldman Sachs, and RBC Dominion Securities) on First Quantum Minerals' $4.1-billion acquisition of Inmet Mining. In 2014, it acted as a sole financial adviser to Nordion in its $725-million sale to Sterigenics.

Mr. Latimer, who has been with Jefferies in Toronto for the past four years, is a career investment banker. He was head of Canadian metals and investment banking with Credit Suisse for three years. From 1992 to 2008, he was an oil and gas banker with UBS.