TORONTO — Restructuring and consolidation in a tough economy and escalating regulatory costs have led to the disappearance or reconstitution of a full 25 per cent of investment firms in Canada during the past three years, according to the Investment Industry Association of Canada.
More than 50 boutique firms are gone, including some that have been overhauled to operate solely in Canada’s less onerous, lower-cost exempt market, Ian Russell, the IIAC’s chief executive, told a luncheon Tuesday in Toronto.
Other small and mid-sized firms have folded outright or been amalgamated.
Despite the consolidation that has already taken place, “significant contraction” is expected during the next couple of years, said Russell, who based his view on a recent survey the IIAC conducted by tapping the chief executives of the association’s 144 investment dealer members.
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“This pessimistic view comes as no surprise given that there are more than 50 investment dealers still operating with gross annual revenue of $5 million or less, a magnitude suggesting insufficient scale to operate under existing conditions,” Russell said.
As has been the case during the past few years, the firms are required to spend more money on technology and compliance to satisfy new regulatory requirements at a time revenue is being hammered by lacklustre economic growth and low commodity prices.
In December, Toronto-based Octagon Capital shut its doors, and Vancouver-based Salman Partners, which has operated for more than 20 years and employs about 40 people, signaled its plans to wind down operations by mid-February.
This followed a steady stream of closures during the previous couple of years that casused some observers to question whether dealers can survive current conditions if they aren’t part of a big full-service bank.
“That’s a fair question given the prolonged double bear markets in energy and mining, which many of the boutique firms relied on for trading and financing activity,” said John Turner, a partner in the global mining group at law firm Fasken Martineau DuMoulin LLP in Toronto.
Russell said it is clear the industry will have to continue to cope with weak economic conditions in the coming year.
“The CEOs [surveyed also] expect the relentless rise in operating costs related to compliance and technology to continue,” he said. “This will further squeeze profitability. It also means the industry will continue to consolidate, with firms merging or shutting down operations.”
Just a few months before Octagon was shuttered, Toronto-based Edgecrest Capital Corp., which had scooped up struggling Stonecap Securities Inc. just last year, closed down and laid off 22 staff.
Edgecrest founder David Beatty, who was one of the original backers of Westwind Partners, which was sold in 2007 for US$155 million, said the prolonged bear market in mining and energy had starved Edgecrest of the capital needed to meet regulatory requirements.
Rising regulatory costs and tough times in the junior resource sector caused independent Toronto investment dealer Fraser Mackenzie Ltd. to shutter operations in 2013 after nearly a decade in business.
That same year, veteran industry player Loewen Ondaatje McCutcheon Ltd. resigned from membership with its principal regulator, the Investment Industry Regulatory Organization of Canada (IIROC). Industry observers said the move allowed the firm to operate outside the purview and attending fee requirements of IIROC.
Despite the bleak trend and statistics, Fasken’s Turner said there are a few bright spots on the horizon.
Firms such as Toronto-based Maxit Capital “have done very well relying on strong advisory relationships,” he said, noting that their business is based on transactional work rather than equity issues and trading.
He added that veteran industry players such as Beatty have “defiantly” vowed to come back.
“While it’s bleak at present with seemingly no end in sight, past experience indicates that when this becomes the perceived wisdom, change is around the corner,” Turner said.