The once-in-a-life­time run for cannabis com­pa­nies masked a shift in the struc­ture of Canac­cord’s busi­ness, An­drew Wil­lis writes

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - AN­DREW WIL­LIS

Hoopla around pot drew at­ten­tion away from growth of firm’s wealth man­age­ment busi­nesses

The cannabis boom in cap­i­tal mar­kets has been a bless­ing and a curse for in­vest­ment bank Canac­cord Ge­nu­ity Group Inc.

The up­side of the two-year bull mar­ket in pot stocks that came ahead of the le­gal­iza­tion of recre­ational mar­i­juana in Canada is ob­vi­ous. Canac­cord chief ex­ec­u­tive of­fi­cer Dan Daviau and his team saw the po­ten­tial for fi­nanc­ing an emerg­ing in­dus­try three years be­fore the fed­eral Lib­eral gov­ern­ment pushed through leg­is­la­tion to le­gal­ize recre­ational use – de­vot­ing in­vest­ment bankers, traders and an­a­lysts to the sec­tor. Bay Street’s favourite topic of con­ver­sa­tion over drinks is how much Canac­cord ex­ec­u­tives are per­son­ally mak­ing off cannabis plays. Best guesses run to the tens of mil­lions.

The down­side for Canac­cord is that the once-in-a-life­time run for cannabis com­pa­nies masked a shift in the struc­ture of its busi­ness. While ev­ery­one was talk­ing about the next hot pot stock, a slow but steady ex­pan­sion of Canac­cord’s wealth man­age­ment busi­nesses that also be­gan three years ago started to show up in the com­pany’s fi­nan­cial re­sults.

Canac­cord’s for­tunes and its stock price usu­ally re­flect mar­ket cy­cles. The com­pany mints money when sec­tors such as min­ing, tech­nol­ogy or cannabis get hot, only to see the cash dry up when mar­kets go cold. The firm made a $62.5-mil­lion pre­tax profit on in­vest­ment bank­ing last year; three years ago, be­fore the cannabis craze and dur­ing a bear mar­ket for small cap com­pa­nies, the same group lost $10.2-mil­lion. In the wealth man­age­ment divi­sion, the firm turned a $34mil­lion profit last year ver­sus $6mil­lion three years ago.

Mr. Daviau, named CEO in 2015, is de­ter­mined to make profitabil­ity far more pre­dictable in the fu­ture by adding teams of fi­nan­cial ad­vis­ers who gen­er­ate steady, re­cur­ring fees to the more vari­able re­sults from Canac­cord’s in­vest­ment bank­ing fran­chise.

Mr. Daviau is the first to ad­mit he’s a deal junkie. The 53-yearold landed Canac­cord’s top job by be­ing ef­fec­tive at help­ing en­trepreneurs build busi­nesses, first as a merg­ers and ac­qui­si­tions lawyer, and then as a tech­fo­cused banker. At Canac­cord, he is com­mit­ting the firm’s cap­i­tal to build­ing the wealth man­age­ment busi­ness, even if that comes at the ex­pense of growth op­por­tu­ni­ties in in­vest­ment bank­ing.

In a re­cent in­ter­view that came on the heels of a re­cruit­ing trip in the U.K., where Canac­cord ad­vis­ers over­see $46-bil­lion in as­sets, Mr. Daviau played down the firm’s prof­its from cannabis deals, while talk­ing up the po­ten­tial to add more teams to a plat­form that is now home to 330 fi­nan­cial ad­vis­ers who over­see $66-bil­lion in as­sets.

For all the hoopla around pot stocks, the sec­tor ac­counted for just 15 per cent of Canac­cord’s cap­i­tal mar­kets rev­enues, and only 9 per cent of the firm’s $574mil­lion of over­all rev­enues in the first half of the cur­rent fis­cal year. When it comes to bot­tom­line re­sults, Mr. Daviau points to a re­cent Canac­cord in­vestor pre­sen­ta­tion that shows if cur­rent trends con­tinue through the rest of the year, wealth man­age­ment is ex­pected to gen­er­ate a $79mil­lion an­nual pre­tax profit, ex­ceed­ing the fore­cast $76-mil­lion profit from the en­tire in­vest­ment bank­ing busi­ness.

Where most in­vest­ment bankers ar­rive at in­ter­views armed with league tables that show the deals they’ve done, Mr. Daviau showed up with a Pow­er­Point pre­sen­ta­tion that pro­files each of the 35 Cana­dian fi­nan­cial ad­vis­ers who re­cently joined the firm, what city they live in, and what firm they came from. He wanted to point out that Bank of Nova Sco­tia, Na­tional Bank of Canada and Richard­son GMP are los­ing top pro­duc­ers to his firm in ev­ery ma­jor city. The new ar­rivals tend to be ex­pe­ri­enced fi­nan­cial ad­vis­ers who bring rel­a­tively large client port­fo­lios, clos­ing the gap be­tween the port­fo­lios run by Canac­cord’s teams and those at the big banks. In Canada, the av­er­age Canac­cord ad­viser over­sees $94-mil­lion in client as­sets, well back of the $204-mil­lion av­er­age for stock­bro­kers at in­dus­try leader BMO Nes­bitt Burns Inc.

“We be­lieve ad­vis­ers rep­re­sent­ing $50- to $100-bil­lion in as­sets will be in play in the next few years, and we will be an at­trac­tive desti­na­tion for these teams,” said Mr. Daviau, who pre­dicts the banks will con­tinue to lose tal­ent as they ratchet down com­pen­sa­tion and pres­sure ad­vis­ers to sell more bank-backed prod­ucts. Canac­cord is spend­ing mil­lions on back-of­fice tech­nol­ogy and com­pli­ance sys­tems as part of its re­cruit­ing ef­fort. Mr. Daviau also pro­duced a chart com­par­ing Canac­cord with nine mid-sized U.K. wealth man­age­ment firms.

These pub­licly traded com­pa­nies, com­pa­ra­ble in size to Canac­cord, have a stock that com­mands a mul­ti­ple of 13 times their fore­cast earn­ings for 2019. The com­pa­ra­ble mul­ti­ple on Can­nac­cord’s stock price is 7.8 times earn­ings.

Canac­cord has used ac­qui­si­tions to build its fran­chise in Europe in the past, spend­ing $135-mil­lion to ac­quire fund man­ager Har­g­reave Hale in the sum­mer of 2017. Mr. Daviau said the U.K. mar­ket is ex­pected to fur­ther con­sol­i­date around its largest play­ers, in part be­cause of rapidly ris­ing com­pli­ance costs.

Go­ing for­ward, Canac­cord’s CEO ex­pects to spend far more time talk­ing about his as­set man­age­ment op­er­a­tions, and less time dis­cussing cannabis.

NIR ELIAS/REUTERS

De­spite the ben­e­fits of the once-in-a-life­time run sparked by the le­gal­iza­tion of cannabis sales in Canada, the sec­tor ac­counted for just 15 per cent of Canac­cord’s cap­i­tal mar­kets rev­enues, and only 9 per cent of the firm’s $574-mil­lion of over­all rev­enues in the first half of the cur­rent fis­cal year.

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