Four months into one of the slowest years on record for small Canadian securities firms, some boutique investment dealers are finally beginning to give in to the reality that making a go of it in this market is a very long shot.
Fraser Mackenzie Holdings Inc., a smallish broker dealer that focused on mining and energy, closed its doors on Monday. The firm said the odds of bringing in good money any time soon were too slim to bother sticking it out in hopes of a market turn.
The partners met and divided up the cash in the firm, and announced that, after nine years in business, the company would wind up.
"Why fight the battle when we can walk away with our capital?" said chief executive officer Mark Polubiec, who added the firm was not in a "distressed situation."
There are 185 boutique investment dealers in Canada, many specializing in resource stocks that have become the last things a lot of investors want to hear about. In March, another small boutique, Loewen Ondaatje McCutcheon Ltd., said it planned to get out of the business of running a regulated securities dealer. Unless the market turns, and soon, more firms are likely to go the way of Fraser Mackenzie and LOM.
As of the end of 2012, the return on equity for boutique dealers was running at 7 per cent, half of what it was six years previously. And that was before 2013 hit, with a huge selloff in gold, and other commodities swooning. Rare is the small dealer that makes any money at all in an environment like this.
Stonecap Securities Inc. recently closed its Calgary office, citing similar dynamics. It is believed more firms will follow, whether by choice or because they simply run out of capital.
Back when Fraser Mackenzie launched in 2004, prospects for small boutique dealers were ascendant. Money was beginning to pour into Canadian resources, and a group of partners with connections and some money could take a piece of the game by setting up their own firm. There was money to be raised, and mergers to help craft. The fees could make such bankers very well off.
Fraser Mackenzie did not have the pedigree of some of the big dealers. The firm's august sounding name came not from its founders, as is often the case at securities firms, but from two of Canada's mighty rivers. However, the firm did some real business. Over nine years, Fraser Mackenzie financed 120 companies, raising more than $7-billion, and employed 80 people. Its capital rose sixfold.
Things have changed drastically. According to the Investment Industry Association of Canada, total revenue at boutiques has fallen by almost a third since 2006-2007. Still, until this year, firms did their best to endure, scaling back costs and conserving capital.
However, 2013 is starting off even worse than last year. Total equity financings on the TSX Venture Exchange, for instance, are down 37 per cent through the first three months of the year from the same period last year.
Customers at mutual funds and other institutions are not interested in buying shares in early-stage mining and oil and gas companies – the companies that Fraser Mackenzie and other boutiques specialize in financing and trading.
Fees on mergers and other advisory work are also drying up. The number and value of merger deals involving smaller mining and energy companies has also slumped. Mergers of energy and mining companies up to $1-billion (U.S.) in value are down 24 per cent in the year-to-date.
At the same time, increased regulation was one of the main factors in driving operating costs at boutiques higher by about 5 per cent a year.
Mr. Polubiec said Fraser Mackenzie explored other options. The firm had looked at mergers with other small investment banks, but could not find a match that would work. Waiting for better times would require enduring money-losing months, frittering away capital.
"To bleed for six to nine months wasn't worth it," Mr. Polubiec said.
There was also the risk that it could be much longer before investors once again are interested in Canadian small-cap resource plays.
"This is the first time in my 33 years in the business that I have no idea when the market will turn," Mr. Polubiec said.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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