If Toronto-based Jovian Capital Corp. wants to achieve its goal of becoming a sustainable and profitable company, it faces the challenging task of doubling in size in the next three to five years.

This is expected to come from acquisitions and organic growth. Prices of asset management firms are expected to come down to “reasonable” levels in the wake of the current market turmoil and volatility, says the firm’s CEO, Philip Armstrong, the former co-founder, president and CEO of Altamira Investment Services Inc.

Armstrong also thinks there could be a doubling of assets under management at Leon Frazer & Associates Inc. , of which Jovian owns 84%, and at fully-owned T.E. Wealth as well as a tripling of AUM at the retail brokerage arm of fully-owned MGI Securities Inc. in the next three to five years. (All three subsidiaries are based in Toronto.)

Jovian has the funds for organic growth and acquisitions thanks to Calgary businessman Murray Edwards, who recently purchased a 31.5% interest in Jovian for $35 million. Edwards is also providing a three-year credit facility for $15 million at 10% interest, a rate that Armstrong says is competitive.

Although Jovian will look at any potential financial services acquisitions, its main focus is asset management firms.

“Success in this arena depends on delivering added value over index returns. Investors are looking for products that can enhance returns and minimize risk,” Armstrong says. Thus, despite the domination of the banks in mutual fund sales, he believes “there’s room for niche players with high-quality products that aren’t available — widely or at all. This includes alternative products and funds with unusual mandates or managed by experts who are not managing other Canadian funds.”

Jovian is interested in companies that offer unique products that “add value to portfolios, but aren’t likely to attract the massive inflows of assets that the big companies are looking for.” It is not seeking companies with a family of core funds.

Jovian’s ideal acquisitions are asset management firms with $2 billion–$3 billion in AUM and annual earnings before interest, taxes, depreciation and amortization of $3 million–$5 million. Armstrong believes Jovian is “an acquirer of choice in many situations because it lets the businesses continue to run independently while supplying management expertise, back office and other services at lower costs than stand-alone companies.”

Jovian had a loss of $4.7 million in the nine months ended Dec. 31, 2007 vs earnings of $2.2 million during the same period a year earlier. There was a decrease in investment banking activity at MGI and a drop in the value of warrants that this firm has received as partial payment for services by companies that are mainly in the resources area. This is a paper loss and the shares may move up significantly before the warrants are sold.

All of Jovian’s other major operating businesses — T.E., MGI’s retail brokerage, Leon Frazer, Toronto-based JovFunds Management Inc. and Winnipeg-based Rice Financial Group Inc. — are currently contributing to EBITDA along with BetaPro Management Inc. , in which Jovian has a 45% interest.

Jovian’s EBITDA was $225,000 in the nine months ended Dec. 31 vs $12.2 million during the same period the year prior. Revenue was $79.3 million, down from $97.6 million because of the drop in the value of warrants. Operating cash flow after the change in non-cash operating working capital was negative $13.5 million vs positive $22 million. Long-term debt was $15.4 million at Dec. 31.

Robin Cornwell, president of Toronto-based Catalyst Equity Research Inc. has a “buy” rating on the stock, with a 12-month target price of $1.75. This target is based on Edwards’ capital infusion and the significant growth potential coming from acquisitions and from BetaPro, whose sales will surpass $1 billion in the next six months or so, Cornwell expects. The 160 million outstanding Jovian shares closed at 71¢ on April 15. That’s down from a high of $1.20 in May 2006.

There are two big questions surrounding Jovian’s future. The first is whether it will continue MGI’s investment banking activities; the second is whether JovFunds will become a strong asset management company.

Investment banking is not a core business, such as investment management and distribution are, and is also very volatile and costly in terms of attracting personnel because of the competition.

@page_break@JovFunds’ mission is to produce investment products that are not commonly available. There hasn’t been a lot of success yet, as witnessed by the group’s total AUM of $1.2 billion. But Armstrong believes that it will have winners among the most recent offerings.

Jovian recently strengthened JovFunds’ management team by bringing in two BetaPro executives. Adam Felesky is now JovFunds’ CEO and Howard Atkinson is now managing partner. Both also continue in their roles at BetaPro. Felesky is its CEO and Atkinson its president.

As for Jovian itself, the management team consists of Armstrong, president Mark Arthur, chief operating officer Russell Lindsay, chief financial officer Jason Mackey and legal counsel Duriya Patel. All are experienced at building and managing financial services companies over a long period of time.

Thomas Rice, founder of Rice, stepped down as Jovian’s chairman last June and retired as a Jovian director in December. Donald Penny, chairman of the audit and risk management committee, is now the firm’s chairman. Larry Moeller, an associate of Edwards’, has been appointed a director.

Here’s a look at Jovian’s businesses in more detail:

> MGI Securities Inc. This was Jovian’s first acquisition, completed in June 2002. At the time, MGI had only a small retail brokerage business with about $150 million in assets under administration. It now has 35 brokers and $1.7 billion in AUA. The target is 100 brokers in the next three to five years, which would likely triple AUA. The business focuses on delivering a high level of service to high net-worth individuals and offers advisors an entrepreneurial environment in a small, flexible firm.

MGI’s investment banking arm specializes in oil and gas, mining and special situations; it also targets small- to mid-sized companies.

There is an employee share ownership plan for MGI employees, which makes available up to 30% of MGI’s shares. “An equity stake encourages an entrepreneurial culture that Jovian believes is important to fuel growth in an investment dealer and to compete against other dealers,” Armstrong says.

David Bird, who has years of experience in investment banking and corporate finance at other institutions, took over as MGI’s president and CEO from Lewis Reford on Aug. 1, 2006.

> Rice Financial Group Inc. This was Jovian’s second acquisition, in June 2003 — and the one that turned it into a publicly-traded company, as Rice was already public.

The plan was to grow Rice’s Prairie-based financial planning network across the country. This has been a slow process. Rice has expanded into British Columbia with the 2005 acquisition of Ascot Financial Services Ltd., but is just now starting to tackle Ontario and it also plans to go into Alberta. The new president and CEO, David Velanoff, who took over when Malcolm Anderson retired on July 4, 2007, is located in Kitchener, Ont. Jovian is looking for growth of about 20% a year at Rice.

Rice has about 190 financial planners, with $4 billion in AUA at Dec. 31, which hasn’t changed much since it was acquired.

This company, which was established in 1968, sells itself as an alternative to big banking and insurance companies; it is working to change its corporate image to that of a solutions provider from that of a product retailer.

> Jovfunds Management Inc. This is the new name of Fairway Asset Management Corp., of which Jovian bought 75% in May 2006 and the remaining 25% in April 2007. Jovian has consolidated all its other investment management and distribution companies into this subsidiary, including Accumulus Management Ltd., which was acquired in April 2004. (The Accumulus funds were renamed JovFunds in August 2007.) It also includes Gibraltar Alternative Asset Consulting Group Inc., a wholesaling group that Jovian launched in December 2002, and Toronto-based Horizons Funds Inc. , which has two hedge funds of its own and whose name is used for the BetaPro exchange-traded funds offered by JovFunds.

JovFunds recently introduced two new products that Armstrong thinks will have particular appeal. The Jov Winslow Global Green Growth Fund invests in companies that are benefiting from the move to higher environmental standards. It is managed by Boston-based Winslow Management Co. LLC, which has a very successful track record over the past 25 years.

The CIBC Gartman Global Allocation series of PPNs should be attractive to the many advisors who regularly read the Gartman Letter,published by Dennis Gartman, a trader and analyst of commodities, currencies, money markets, bonds and futures contracts in Chicago.

Armstrong says JovFunds has enough capacity to double or triple its size given the resources Jovian has put into JovFunds’ infrastructure, including marketing, sales and administration.

> Leon Frazer & Associates Inc. Founded in 1939, this company primarily manages equity for high net-worth individuals; however, it also has trusts and foundations as clients. It does its own money management, mainly using North American securities. It had $1.7 billion in AUM at Dec. 31 vs about $700 million when it was acquired by Jovian in June 2004.

The first step after it was acquired by Jovian was the integration of systems; the process is about halfway finished. Capacity is also being increased and the company is about a third of the way through a program to increase brand awareness. “This is an excellent brand, but it is not well known,” says Armstrong. The awareness program involves advertising, improving marketing materials, hiring new business developers and marketing mutual funds managed by Leon Frazer.

Acquisitions could also play a role in Leon Frazer’s growth.

In 2005, Doug Kee became CEO and chief investment officer, which was then a new position. Bill Tynkaluk remains as president.

> T.E. Wealth. This is the brand name for T.E. Financial Consultants Ltd. , which offers financial planning services mainly to high net-worth individuals, and T.E. Investment Counsel Inc. , which finds outside managers for TEFC clients and for TEIC’s investment pools. TFEC has 25 financial planners. TEIC has $2.4 billion in AUM at Dec. 31, up from $700 million when Jovian acquired the firm in October 2003.

T.E. advisors are not required to use T.E. pools but most clients are in these pools.

T.E. started by handling financial planning and deferred benefit plans for executives of corporations; it still does this. Its comparative advantage is in the education it provides employees to help them choose the risk profile and mix of managers they want.

Like Leon Frazer, T.E. is an excellent but not well-known brand. Its systems are mostly integrated and it, too, is about a third of the way through a brand awareness program that is very similar to Leon Frazer’s, including marketing mutual funds through JovFunds that mirror the pools that T.E. offers its private clients. In addition, there’s advertising and sponsorships. T.E. is also aggressively recruiting successful financial advisors and business developers.

As with Leon Frazer, acquisitions could play a role in T.E.’s growth.

> Betapro Management Inc. This company was launched in November 2005 by Jovian and three partners. It provides investment tools that may enable investors to profit when the market is rising or falling or to reduce their risk by hedging existing market positions. Jovian originally owned 33% of BetaPro; it upped its stake to 45% in April and has also announced a “binding letter of intent” to acquire a further 15% stake, which is expected to close in mid-June.

BetaPro has been very successful and is now the second-largest provider of ETFs in Canada with about $1.1 billion in AUM. However, it is still tiny compared to Barclays Global Investors Canada Ltd.’s iShares, which had $16.5 billion in AUM at Dec. 31.

Both Armstrong and Cornwell expect continued strong growth for BetaPro. Armstrong expects it to grow at an average of 20% a year over the next five years and BetaPro’s growth is a major factor behind Cornwell’s “buy” recommendation and his $1.75 12-month target price.

Cornwell believes the BetaPro ETFs are in a really sweet spot because they are inexpensive, easy to buy and sell, provide two-to-one leverage and have the rights to the S&P/TSX capped name on their products for five years, with an option for a further five years. IE