CEO Paul Reynolds has used acquisitions to broaden the company’s business.JENNIFER ROBERTS/The Globe and Mail
The head of Canada's biggest independent securities firm is girding for another few years of commodities slumping, and looking to other parts of Canaccord Financial's business that he has built up in recent years to carry the load.
Paul Reynolds, chief executive officer of Canaccord, has unveiled big acquisition after big acquisition to broaden the company's business. In 2010, Canaccord laid out about $286-million in cash and stock to buy Genuity Capital Markets, an investment banking firm with an emphasis on advisory work and a list of corporate clients in areas that weren't Canaccord strengths such as industrials and transportation companies. These days, Genuity partners are largely running the investment banking operations at the merged firm.
Two years later, the company paid about $400-million to buy Collins Stewart Hawkpoint PLC, gaining a bigger and more upmarket presence in the United Kingdom, including in the increasingly key wealth management business. The firm has also opened offices in other countries, including across Asia, and made high-profile hires in Asia and Europe. Half the firm's revenue now comes from outside Canada.
It needs to pay off, because the traditional commodity-based business here in Canada is unlikely to come back soon. As that reality has sunk in, Canaccord's stock has slumped from $7.83 in January to $5.93 Monday. Analysts are lukewarm, with only one buy among the seven analysts who track the firm, according to Bloomberg.
"I've been through several of these cycles," Mr. Reynolds said in an interview in the boardroom of Canaccord's Toronto office, overlooking Lake Ontario. "We're 18 months into a five-year correction."
"The good times will come back but it's going to be a couple of years," he added.
So far, the diversification is having an effect. The Genuity connections have been bringing in revenue from deals the old Canaccord would have been unlikely to snag, in areas such as real estate and agriculture. The company booked record revenue from advising on deals in the quarter that ended Dec. 31.
But will it be enough? Analyst Sumit Malhotra at Macquarie is not sure it will. Canaccord has had to double its shares outstanding as part of its global expansion, and earnings have not kept pace.
In his view, "for the deals to ultimately be considered a success, the aggregate net income contribution from the various pieces at Canaccord has to move materially higher." In the meantime, "we have a hard time thinking that the stock can really work without a strong contribution from the resource-related deal flow that has always been the core of the Canaccord franchise."
Canaccord has not reported results for its most recent quarter yet, when the securities business in Canada slowed even more. But rival GMP Capital has, and the results show the importance of having businesses outside mining and energy, and in wealth management. In its most recent quarter, GMP's capital markets business reported a small pretax loss as mining and energy investment banking revenue fell by about 70 per cent apiece. Its wealth management business generated pretax profit of $1.5-million.
With the grim outlook for mining and energy, Canaccord is working to revamp its Canadian retail business, which provides wealth management services to individuals. In Canada, the firm long had a force of brokers who generated revenue through trading commissions on small-capitalization stocks. Now, that business is moribund. Small stocks, especially in mining and energy, have been hammered. Also, regulators are changing the rules to dial back how much risk a broker can offer a client. That means more balanced wealth management products and fewer trades.
"People don't want the volatility they had," Mr. Reynolds said. "Clients are demanding a more balanced portfolio."
So firms like Canaccord are pushing hard to try to convert the books of business their advisers run to a higher proportion of fee-based asset management. Those fees roll in whether clients are trading or not.
Investment advisers at Canaccord who have a "well-rounded book" with a strong portion of fee-based business "their books have grown and they are having their best years ever in this market," Mr. Reynolds said. On the other side, transactional "production is down big."
The other change for Canaccord is how much of its retail business is outside Canada. Broker teams in this country oversee $11.4-billion for clients, less than half the $27-billion the firm oversees globally.
The next beachhead is likely to be Singapore, which Mr. Reynolds reckons is the fastest-growing wealth management market in the world.
But from here on out, Canaccord is likely done making big acquisitions. "We've got the size and scale we need," Mr. Reynolds says.
Now it's about making the ones he has already done really work.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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