Why boutique dealers are still struggling

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Canada's boutique investment dealers can't catch a break. This is the best year for equity and acquisition fees since 2007, yet many of the country's smaller investment banks are still struggling to scrape by.

The situation is so severe that the Investment Industry Association of Canada recently suggested between 30 and 40 smaller dealers could vanish in the next two years by either closing or merging.

There are the obvious reasons for the sustained struggle. Deal flow in key sectors such as mining is still weak. Many of the smaller players rely on financing resource-related companies listed on the Venture Exchange.

IIAC head Ian Russell also told The Globe and Mail that regulatory costs keep rising, and that puts pressure on smaller dealers who are already suffering from soft revenues.

But there's another variable in this equation, and it hasn't received much attention. Even though the big investment banks are booming, they're still competing for smaller deals. If, for example, CIBC World Markets Inc. pitches for an equity financing against Paradigm Capital, CIBC can tout advantages such as its retail broker network to help win the mandate.

This probably sounds a little strange. The country's bank-owned investment banks are swimming in fees this year, yet they're still going after smaller deals. Why? An investment banker at one of these firms sheds some light: although the fees are so plentiful, it hasn't been insanely busy, and that gives the big dealers more time to go after smaller financings.

Bank of Nova Scotia's sale of its stake in CI Financial Corp. is a perfect example. Scotia's executives made the decision to unload much of the position pretty quickly, and the $2.6-billion deal blew out. It's an easy cheque.

There's also a fear that that all this deal flow could dry up. Everyone knows the equity markets have been incredibly hot, and many people suspected the market could correct itself at any point because nothing goes up forever. The big investment banks, then, have taken advantage of any financings they can handle.

This doesn't mean only the biggest investment banks have benefited. Mid-tier players such as GMP Capital and Canaccord Genuity have rebounded quite nicely. And Peters & Co., for instance, is one of the lead underwriters on the new Seven Generations initial public offering. But the market is undoubtedly bifurcated.