May 17, 2013 – ceo.ca – “Technology has changed financial services. The young people who understand that and embrace the change are going to be the next generation of winners in the industry.”
Difference Capital CEO Neil Johnson thinks Canada’s capital markets are changing. “From a compliance and regulatory standpoint, the costs have never been greater,” he told me last Friday. “From a trading and revenue perspective, commissions have been reduced to almost nothing.”
Add these challenges to the recent resource bull market bust, and you can see how the market is transitioning. Venture firms are becoming wealth managers, independent brokerages are consolidating, and shops are shuttering almost weekly.
So what are the some of Canada’s top financial entrepreneurs doing about it? Legendary trader Mike Wekerle has teamed up with some of the industry’s top dogs in a promising new venture called Difference Capital (TSXV:DCF). It invests in and advises technology, healthcare, and media businesses.
“I’ve been sector agnostic for 32 years,” Wekerle told me on the call with Difference. “I prefer moving from cycle to cycle. Money flows are really the key thing, and a bull market is clearly coming in technology.”
“The Canadian capital markets are still extremely overbought in resources, 49% as of last month,” said Johnson. “At the height of the dot com mania in 2000, tech and media deals accounted for 28% of the Canadian capital markets. Now it’s under 3%. The pendulum needs to swing back. The sector rotation could see as much as $200 billion coming into the sectors we’re investing in at Difference.”
Capital markets sector allocation in Canada and the US. Note the non resource growth gap between both countries. Source: DCF
The Difference model is to partner with companies that have a 2- or 3-year plan to create value for shareholders, whether through a go-public transaction, international expansion, or a transformational merger or acquisition that needs capital. They’re looking at intellectual property-rich companies, and $3-5 million is their average deal size, although they have investments ranging from $1 million to $16 million (Virgin Gaming).
Their portfolio to date includes gaming, green tech, healthcare and media businesses. One of its projects is Thunderbird Films, whose joint venture with Lions Gate Films, Sea to Sky Entertainment, was put together by mining and movie mogul Frank Giustra. Another is BrainScope, a real time patented concussion detection system, currently in FDA trials.
In addition to capital markets and investing knowhow, Difference consults partners on international expansion, media, communications and government relations.
The roster at Difference Capital has extensive connections and experience. Executive Chairman Mike Wekerle, whose career took off when he was recruited by Brad Griffiths and Gene McBurney to GMP Capital in 1995, is the firm’s largest shareholder.
Executive Vice Chairman Paul Sparkes was formerly EVP at CTVGlobemedia now Bell Media, and before that, he was Director of Operations at Jean Chretien’s office as prime minister. CEO Neil Johnson led Canaccord’s UK office for ten years. COO/CFO Harry Kneis has 25 years experience as a CEO and CIO. Managing Partner Jamie Brown, who will be building out Difference’s Vancouver office, ran Canaccord’s US Investment Banking business up until last year. General Counsel and Managing Partner Jeff Kehoe oversaw enforcement at the Investment Industry Regulatory Association of Canada. Head of Investment Strategy Tom Astle has been a top-ranked growth analyst at international firms for over two decades.
Despite a lineup that rivals any Canadian investment bank, Difference isn’t trying to compete. Its mission is to help early-stage companies get to the place where they’ll need the services of larger banks.
“Our focus is on providing deals for other capital market participants,” Johnson told me.
The merchant banking model isn’t new to Canada. Well-known Onex Corporation runs a similar, albeit larger model. Endeavour Financial acted as a merchant banker for dozens of growing resource companies in the early part of the last decade, earning multiple billions for investors.
I asked Johnson about Difference’s decision to operate as a public company. “It was our opportunity to inject fresh capital into an already public vehicle that had over $150 million in capital tax losses left over from previous management,” he said, also citing the fact that the cost of being public is relatively small when compared to the capital Difference currently controls (over $100 million).
In addition to being equity investors in the public vehicle, management also receive 2% of the NAV per year, as well as 20% of the performance of the portfolio above a hurdle rate (a two-year bond rate). Advisory fees will more than cover the 2% of NAV by the end of this year, Johnson told me.
Investors seeking growth exposure outside of natural resources are looking into Difference’s common shares, which have been bought up by insiders in the open market recently. In part, Difference manages risk with the diversity of its portfolio, and will soon provide an income stream to shareholders.
Whether the sector rotation in Canada away from resources and back into technology will play into Difference Capital’s strengths, only time will tell. Mike Wekerle and the members of his team are believers. “We own big in our own stock for a reason,” he told me.
The legend of the Wek is not all hype. Mike helped finance hundreds — if not thousands — of growth companies throughout his 30-year career, including technology giant RIM in the late 1990s. Even Frank Giustra attests that the Goldcorp and Wheaton River Minerals merger wouldn’t have happened without Wekerle.
“Wek knows how to get the guys with the money to make a move. He’s a catalyst to make things happen,” Frank said.
Wekerle would only admit some responsibility for the Goldcorp/Wheaton deal. “I started talking to [then Goldcorp CEO] Rob McEwen in 1984 and 1985, when we were both a lot younger. It goes to show when you’re a young kid in your 20s and you have a client who might not be that big yet, that can change. Working hard on a small account may turn out to be a very large account down the road.”
The Goldcorp/Wheaton deal would ultimately create the world’s most valuable gold miner. Wekerle now brings his personal fortune — and the best connections in Canadian finance — to the table at Difference.
It is, however, those around the Wek at his new firm who are going to be most responsible for day-to-day operations. People like CEO Neil Johnson, who has a long, executive-level track record in investment banking, but is young enough to remain relatable and engaged with growth company executives.
I asked Johnson where he saw the Canadian investment industry going now that he’s no longer on the inside. “Technology has changed financial services. The young people who understand that and embrace the change are going to be the next generation of winners in the industry.”
We thank Mike and Neil at Difference Capital for participating in this interview and encourage venture capitalists, as well as growth companies CEOs, and investors, to stay up to date with the company.