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Mid-sized investment dealers were riding high in 2007, feasting on healthy markets and booming commodity prices that drove underwriting, trading and acquisitions.
But today, the approximately 180 smaller or boutique firms in Canada are struggling with chronic weak business conditions in an increasingly tough competitive landscape.
The Investment Industry Association of Canada and other industry watchers have been warning for a couple of years that many of Canada’s smaller firms are on precarious ground and many could cease to exist without a significant recovery in the small-cap trading and underwriting business.
“The traditional model of the independent firms relying on trading and corporate finance is broken, at least for the moment,” says John Turner, a partner who heads to global mining practice at Toronto law firm Fasken Martineau DuMoulin LLP. On Monday, Stonecap Securities Inc. was swallowed up by Edgecrest Capital, a relatively new player in the industry.
The consolidation follows the closure last April of independent investment dealer Fraser Mackenzie Ltd., which shut its doors after nearly 10 years in business. The firm, which was among those heavily exposed to the fortunes of the junior resource sector, cited difficult business conditions and mounting regulatory expenses.
Another indication of recent trends came in last year’s resignation of longtime industry player Loewen Ondaatje McCutcheon Ltd. from membership in its primary regulator. Industry watchers suggested the independent firm planned to pursue business outside the purview — and fee requirements of the Investment Industry Regulatory Organization of Canada.
Some of the difficulties for the independent dealers can be traced to shortly after a banner year in 2007. That was when Canaccord Capital surprised Bay Street by displacing a number of the big banks to claim second place in the league tables of new equity and trust issues.
At the time, commodity prices were booming and the mid-tier brokers were profiting from their expertise and relationships in commodities-driven sectors like junior mining.
But the financial crisis in 2008 dried up a lot of financing and trading activity, conditions that caused the big banks to move “downstream” into the traditional territory of smaller dealers. When deal-making did occur, analysts said, the big banks were most often the winners because they could offer a suite of services to companies — including loans.
The crisis also forced smaller dealers to back away from risky trading, a move that crimped their profits.
“No question the independent brokers focused on the mining sector have had a tough time [in the past few years],” says Mr. Turner.
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