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