CEO's Message

A confluence of macroeconomic events in 2016 resulted in another series of challenges for our industry. A volatile and uncertain market environment in the first half of the year weighed heavily on client activity levels and, in turn, our financial performance.

Fellow Shareholders,

There was a noticeable flight to liquidity and perceived quality in large-cap names. This hit the small- to mid-cap sector particularly hard, especially oil and gas. This negative sentiment gave way to moderate growth momentum late in the third quarter led largely by OPEC’s decision to cut global crude oil production and improved equity markets sentiment post the U.S. presidential election. We ended the year with an adjusted net income of $5.5 million on total revenue of $196 million. It is worth noting that while revenue was down 12% year-over-year, adjusted earnings improved substantially which is reflective of the firm’s improved operating torque. While we are pleased to have generated positive adjusted net income, our performance was nonetheless below expectations. The other side of our story in 2016 was the considerable progress made toward strategically repositioning our franchise in the Canadian independent brokerage space. We strengthened our financial resilience by managing our cost structure while simultaneously investing in our future with the acquisition of Calgary-based FirstEnergy — an industry leader in energy. As a result, we built considerable operating leverage to an upturn in the market environment. These initiatives are beginning to bear fruit as evidenced by our fourth quarter 2016 earnings, where we generated adjusted diluted earnings per share of $0.07 and adjusted ROE of 10.2%. We are energized about the opportunity to realize GMP’s full potential heading into 2017.

Establishing a Clear Path Forward

We set a clear path forward for our franchise to ensure we are better positioned to win. As the saying goes: The enemy of the good plan is the search for the perfect one. Simply put, we recognized that waiting around for market tailwinds was not a viable strategy. Our costs were too high given the new normal facing our industry and a daunting operating environment, particularly acute in commodities, mandated the rationalization of certain underperforming businesses outside of Canada. We took real and decisive action. This approach enabled us to focus on the following three key initiatives:

1.) Major restructuring of our Capital Markets business leading to substantial cost reductions and considerable operating torque;

2.) Strategic acquisition of Calgary-based FirstEnergy; and

3.) Staying the course with regards to our ownership stake in Richardson GMP.

Capital Markets Restructuring

The last several years have proved to be challenging for GMP. Our industry underwent fundamental structural change while having to endure the more challenging stages of the commodities cycle. In response, we materially restructured our Capital Markets business. In last year’s letter I shared with you the communication delivered to our employees outlining the drivers of that process. We were guided by a simple operating mantra: “Sustain the business and preserve capital and liquidity in the market troughs in order to exploit the opportunity for earnings torque in more robust markets”. In 2016, I am pleased to report that we delivered against what was within our control. We reduced our total fixed costs and headcount by one-third, or approximately $50 million in cost savings, and we exited underperforming businesses in jurisdictions outside Canada. Much of the heavy lifting was completed in early 2016, with additional rationalization occurring in connection with our FirstEnergy acquisition. Having gone through this process, we are able to react to changing market conditions quicker than ever before. These efforts have been highly impactful and will prove meaningful to the longer-term performance of this franchise.

Strategic Acquisition

In 2016 we significantly enhanced our energy franchise by acquiring Calgarybased FirstEnergy, rebranded as GMP FirstEnergy. We added what we believe is the country’s pre-eminent energy franchise. Consideration paid was in the form of restricted shares and a fiveyear promissory note. The structuring of the deal was important. With minimal upfront cash outlay, we were able to preserve our solid capital positioning while ensuring that our new partners are fully aligned as significant owners of the business.

FirstEnergy has been an important part of the fabric of the Canadian energy culture for nearly a quarter century and adds substantial scale to our energy capabilities. Our new partners are highly accomplished energy sector specialists, and our efforts will be focused on providing support, through a broader platform and more efficient access to capital to help them extend their leadership and continue growing the franchise. Notwithstanding the negative investment bias towards oil and gas at the time of the transaction, we continue to believe these assets are incredibly important to the economy of our country and a viable part of the global energy stack for the long term. This transaction is reflective of that belief and is a strong vote of confidence in the recovery of Western Canada, particularly the Calgary community. A dominant domestic energy franchise has long eluded the major diversified independent brokers. Success and sustainability in the Canadian capital markets, given it is heavily skewed toward resources, requires maintaining leadership in both energy and mining. We have always been recognized as a premier mining franchise and this transaction will add substantial energy leadership. In fact, we are now the only national integrated independent with a top-tier franchise in both mining and energy. While still early days, GMP FirstEnergy is an excellent cultural fit and our teams have done an exceptional job at integration. Without any doubt, we are a better firm post acquisition.

Richardson GMP

This past year, working closely with our partners at Richardson GMP, we dedicated a considerable amount of time discussing and analyzing various strategic options relating to our ownership stake in this coveted wealth management asset. We knew we had helped build a special business and the partnership was working well. We looked at a number of alternatives, including monetization via the sale to a third party.

We undertook a comprehensive review of the business that reinforced what we already know. By any measure, Richardson GMP is a top-tier independent Wealth Management firm with:

1.) At scale business with client assets under administration of $29.4 billion;

2.) A high proportion of fee-based revenue relative to total client revenue;

3.) A streamlined cost structure; and

4.) Strong financial performance.

In that context, we explored several alternatives. Through this process, it became clear to us there was significant value in staying the course. The lessons learned through the process have been invaluable and will go a long way toward further optimizing the business. As the industry continues to evolve, we see a significant opportunity for an independent Canadian Wealth Management firm with scale that is not conflicted in the provision of advice and is product agnostic. Richardson GMP intends to be at the forefront of that change. This business is highly profitable and remains synergistic with our wholesale platform and is a highly attractive alternative for experienced IA’s and their high-net-worth clients.

Key Opportunity for a Strong Independent

Our industry has undergone profound structural change in the period since the 2008 global financial crisis. Without question, this has led to a clear bifurcation among industry participants — those with the financial capacity to adapt and those that are becoming marginalized. GMP clearly falls into the first category. It was incumbent upon us to embrace change and adapt our business model. We examined the competitive landscape and the role played by independent firms, like GMP, within the capital markets ecosystem.

It comes as no surprise that the ranks of the independent dealers have thinned considerably in Canada over the past three years. These firms simply lacked scale, capacity and diversity to withstand a prolonged challenging operating environment. While others debated the demise of the independent player, we saw an opportunity. We believe 2016 was the ideal time to present the market with a stronger, better diversified player among independents. GMP fills a void in the competitive landscape between the large bank-owned firms, who aim to be everything to everyone, and the smaller boutique players.

For many early stage entrepreneurs looking to grow their business, access to credit via Canadian banks is simply not a viable option. As such, the role of a strong independent player has never been more critical if we are to continue to see capital flow to the small- to midcap segments of the markets. Small- to mid-cap companies realize the value of deep industry expertise, unbiased advice and exceptional execution given there is traditionally less reliance on ubiquitous electronic marketplaces for trade execution. Unlike some of our larger competitors, this has been GMP’s sole area of focus since inception and, as such, it is in this arena that GMP remains disruptive competitively.


An uncertain market environment has become the new economic reality. Without question this has been a prolonged down cycle. Throughout this period, our franchise continued to demonstrate its resilience and adaptability in the face of considerable adversity. Our response was both decisive and timely.

As we look at the business in 2017, the following are readily apparent:

1.) We are where we need to be operationally. We are lean. We have the right team in place to run the business, protect capital and weather the inevitable storms.

2.) GMP FirstEnergy transformed our energy franchise.

3.) Our standing among independents in Canada is clearly dominant.

4.) Focus on further strengthening the non-commodities portion of our business.

Our actions in 2016 reaffirm our belief in the independent model and signal the emergence of a stronger, more diversified and battle ready GMP. We delivered against our goal to ensure we remain competitively disruptive while strengthening our financial resilience. We believe we have built a dominant independent player in the Canadian small- to mid-cap market and we will continue to facilitate the flow of capital to emerging companies that represent the future of our economy. That said, there are always opportunities to improve. Today, GMP is the only Canadian national independent player with scale in both Capital Markets and Wealth Management.

The stage is set and we look forward to the future with optimism.

President and Chief Executive Officer of GMP Capital Inc.