CEO Letter

Fellow Shareholders, 2015 proved to be a challenging year for our firm as the industry endured the more difficult part of the cycle. For GMP, it can best be described as a year of fundamental change and resilience.

In 2015, we reported an adjusted net loss of $21 million on total revenue of $222 million. The year past marks our first annual loss since our IPO in 2003 and evidences the cumulative effects of negative global macro events. While our financial and share price performance were disappointing, we are encouraged by the progress made toward executing against a very clear agenda to reshape our Capital Markets business in response to a changing competitive landscape among the ranks of independent brokers in Canada. In Wealth Management, together with our partners at Richardson GMP, we have built, what we believe is, the only viable Canadian independent alternative to the bank-owned wealth managers. Richardson GMP is Canada’s largest independent wealth management franchise and it remains a highly compelling and synergistic part of GMP. We look forward to the day when both the wholesale and wealth management engines are firing simultaneously. On January 13, 2016, we announced a material restructuring of our Capital Markets business. All aspects of the business were the subject of extensive analysis and review. Our actions are intended to be a comprehensive response with no need for subsequent measures.

Let me share with you the communication delivered to our employees that morning: Today is a tough day for all of us, especially our partners who lost their jobs. We parted ways with some very good people. The decisions made were gut-wrenching and the cause of many hours of lost sleep. At all times, we tried to be respectful and fair. The decisions were the result of extensive discussion at the Executive Committee (along with other leaders of the firm) and were vetted and approved by our Board.

Competitive Landscape
The drivers of this process are well known to us all and are both structural and cyclical in nature. On the cyclical side, ours is a market heavily skewed towards resource companies with over 60% of TSX listed entities with $1 billion or less in market capitalization residing in the mining or oil & gas space. With commodities at cycle lows we have witnessed a dramatic and sustained contraction in global capital markets activity that could not be offset by a strong performance in the non-commodity portions of our business. That’s called reality.

On the structural side, our industry has been deeply impacted by the commoditization of the secondary portion of the equity business driven by technological disintermediation and regulatory entrenchment. While Research, Sales and Trading remain vitally important to our value proposition, especially on the primary side, the simple fact is that the buy-side is no longer willing or able to pay for the bulk of the cost of providing these services. We have no choice but to respond.

Our challenges extend further in the face of the ongoing monopolization of financial services in Canada by the big banks. In Capital Markets, we see ongoing small- to mid-cap market incursion by the banks led by loan-based investment banking. Over the past 3 years we have seen 50 investment dealers close their doors. This represents 25% of total IIROC membership. Of those remaining, over one third do less than $5 million in annual revenues.

That said, there will be no regulatory roll-back of anti-competitive practices as the amorphous blob that is the bank oligopoly will continue to expand in search of new revenues and earnings. Technology will not cease its tireless march to remove friction, and therein cost, from the system. Moore’s Law is alive and well. Our clients are not coming to the rescue. They are struggling to deal with their own “new normal.” And there is no public lobbying effort in the wings – the annual convention for supporters of the independent brokerage community could be held in a canoe. It’s all on us. We either add value or we cease to be relevant. And that’s the way it should be. We earn multiples of what the average Canadian or American hauls home. Every day we have to step up and earn it.

Allow me to briefly review the actual changes undertaken today. We are exiting the U.K. market. This decision was especially difficult given our long and mostly successful tenure since 2006; but is reflective of the daunting operating environment since 2012 arising from profound structural change and the long-term downturn in global mining. The local partners did their able best. We will retain a Sales function to service London so as to facilitate institutional coverage, corporate roadshows and new issue sales into our European client base. Our decision means the departure of just under 30 personnel.

We are also exiting the Australia market. The team there posted reasonable results and we saw the benefits arising from the new management team put in place in early 2015. However, we came to the view that the ongoing commodity malaise and the disruption to that market meant that the business would never be sufficiently material or strategic to our core franchise. Our decision means the departure of 12 personnel. Our Asia franchise remains fully viable. The small (7 personnel) and highly effective team will continue to offer critical access to key Asian accounts on buy and sell mandates for our North American investment banking teams.

In the United Sates, we reduced our staff complement in the Energy business by 10 personnel, which represents in excess of 30% of headcount in that group. We continue to believe in the depth and quality of our Energy team and look forward to the eventual return of better conditions in the oil patch. In fixed income, the former MTR remains a strong and viable player in the high yield, emerging market and convertible debenture markets. We continued to optimize operations and reduce fixed costs in this division throughout 2015. Total headcount in the U.S. is now 105. On the domestic front, GMP Securities remains a robust competitor in all aspects of the Canadian small- to mid-cap market. That said, the above mentioned structural and cyclical factors required a substantive competitive response. We reduced headcount in Canada by 29 today. This combined with reductions undertaken throughout 2015 amounts to a total reduction of 51 personnel and brings total staffing down to 178.

Our M&A business also benefited from robust activity in 2014, largely led by success in our mining franchise and our debt work-out and restructuring business in the U.S. There are a number of convincing reasons to be bullish on M&A heading into 2015 as clients look for value creation opportunities. Commodity prices are at cyclical lows, many corporate clients have strong cash balances and the weakening of the Canadian dollar relative to other foreign currencies may attract international interest. The extended low-interest rate environment should also continue to spur real-estate-driven M&A, namely REITs.

Our results clearly demonstrate the resiliency of our diversified global franchise and momentum across our strong, clientfocused institutional business. Heading into 2015, we will continue to look prudently at growth outside Canada where we have existing expertise and invest in opportunities and talent via dislocation in the markets. We will also continue to build on our expertise in the energy and mining sectors to support the global growth strategies of our clients.

Lastly, we look to growing further the non-commodity portion of our domestic business. But, above all, we will remain committed to our clients – providing them with superior service and excellence through execution.
We expect the measures undertaken today together with the initiatives implemented in Q3 to produce annualized cost savings in excess of $40 million. Year-over-year total headcount drops from 401 to 291 — a 27% reduction.

The Way Forward
In many ways I view the measures taken today and throughout 2015 as a testimony to the strength of our franchise. They represent what others in our industry would very much want to do had they the will and the wherewithal. GMP clearly has both. Yes, our industry faces considerable challenge as it faces down structural and cyclical factors. And yes the ranks of independents in the Canadian brokerage space will likely continue to thin dramatically. This is simply the new normal to which industry players will either adapt or cease to be viable.
GMP emerges from this process a leaner, more robust and more focused competitor. We remain a strongly capitalized public entity with a powerful brand and 20 years of market incumbency. We have an enviable governance, compliance and risk management track record. And, no bank can compete with us in offering a comprehensive and coordinated solution for our customers through the combined efforts of Sales, Trading, Research and Investment Banking. Together with our partners at Richardson GMP, we continue to represent a strong and viable independent alternative to the bank oligarchy in the Canadian financial services space.

Adversity brings with it clarity. And clarity provides the most viable perspective from which to address adversity. The very clear message to you today is that you are an important part of the future of this firm. That said, each of you have to ask yourselves if you still have the will to compete in this industry and, just as importantly, on this platform? Have the courage to answer honestly. There are easier paths to pursue and much easier places at which to pursue them. If this is not what you truly want and where you want to be you simply will not survive the new normal in our industry or at our firm.

Tomorrow we leave harbour. The course is set and the ship is ready. There will be hard days ahead; but there will be great days as well. Climb aboard. Grab an oar. Who dares, wins. ”

Thank you for continuing to place your trust in GMP.

Harris A. Fricker
Chief Executive Officer and President, GMP Capital Inc.