With the third leg of its business established and two joint ventures in place to support its other business lines, Toronto-based investment dealer GMP Capital Trust is positioned to expand its activities, extend its client base and strengthen its product lineup.

CEO Kevin Sullivan sees plenty of room for growth.

Last year, GMP acquired Edge-Stone Capital Partners LP, adding private equity to its established capital markets business and its growing retail client operation. EdgeStone not only gives GMP a significant presence in private equity, it also represents a major step in increasing the number of corporate clients that GMP Securities LP enjoys, as well as getting the securities arm involved with companies at an earlier stage in their development.

To shore up the parent’s capital markets offering, GMP has formed a joint venture with New York-based Lazard Ltd. , an international mergers and acquisition specialist, to provide GMP clients with cross-border M&A advice. GMP also established GMP Securities Europe LLP to give underwriting clients access to European equity markets.

Sullivan believes EdgeStone clients will turn to GMP Securities for investment banking and M&A advice. If the clients decide to go public, GMP can offer underwriting services. “Relationships are the key to success in the brokerage business,” Sullivan says. “You have to offer the products and services that clients want. Once companies go elsewhere for a particular need, you run the risk of losing some or even all their brokerage business to the alternative supplier.”

That also applies to GMP Private Client LP, at which a growing number of advisor teams focus on high net-worth clients. Sullivan sees the executives at the small and mid-sized companies that are GMP Securities’ bread and butter as potential clients, as long as GMP Private Client has the right product mix.

To address that, GMP formed a joint venture earlier this year with PPI Financial Group Inc. , a Toronto-based insurance managing general agent. GMP advisors now have access to a “deep inventory of insurance products” from insurers, as well as proprietary solutions exclusive to PPI, Sullivan says.

On the banking side, GMP has a referral arrangement through which private clients have the option of moving their banking services to Waterloo Ont.-based Manulife Bank, a subsidiary of Manulife Financial Corp.

GMP is also looking at ways to provide debt financing, possibly through a partnership, but has not yet found an effective solution. Sullivan see this as a major gap in the GMP product lineup as it makes the firm vulnerable to losing clients to banks. But, he says, the small and medium-sized companies upon which GMP focuses aren’t that attractive to the big banks. The fees for providing products and services to small- and mid-cap companies aren’t big enough to interest the banks.

So far, GMP’s strategy has proved profitable. In the six months ended June 30, it reported revenue of $229 million, up 30.3% from $175.7 million in the same period a year earlier. Net income was $71.2 million, up 7.4% from $66.3 million a year earlier. The 12-month trailing return on equity was 48.4%, vs 43.6% a year earlier. These figures exclude a $13-million pretax gain and a $11.8-million after-tax gain related to the public listing of Montreal Exchange Inc. shares, of which GMP owned 300,000.

Cash flow before net change in non-cash working balances was negative $21.1 million, vs $99.9 million a year ago. Long-term debt was $60 million.

The capital markets division accounted for the lion’s share of revenue, $206.5 million, and Sullivan expects capital markets to remain the dominant business. But within five years, the wealth-management and private-capital arms together could account for 40% of revenue and net income. Both are more stable and predictable businesses than capital markets, so the bigger their share, the less volatile the company’s overall results will be.

GMP’s business model is based on employee equity ownership. The aim is for income from equity ownership eventually to exceed that of employment income at its division. Sullivan notes that this occurred at GMP after three or four years. An income trust — GMP went public at the end of 2003 and converted to an income trust two years later — it has 41.5 million units and 21.9 million special voting units outstanding. The latter were issued to those “wishing to avoid onerous tax treatment” at the time of conversion to a trust. Both units carry one vote each.

@page_break@The unit price has fared well. It hit a low of $17.20 on Nov. 2, 2006, after the federal government’s announcement concerning the taxation of income trusts, but was back to $21.55 by the end of the month. In mid-August, a unit was trading around $20.38.

Sullivan says GMP will remain an income trust until the tax advantages expire in 2011, when it will revert to a corporation. Without the tax advantages, he says, it is expensive and time-consuming to be an income trust.

Here’s a look at GMP’s three businesses in more detail:

> Capital Markets. Capital markets is the biggest of GMP’s activities, accounting for $206.5 million or 85% of its revenue in the first six months of 2007. The division accounted for 95% of pretax profit of $105.3 million, excluding a loss of $11.7 million for corporate activity.

GMP Securities was also No. 1 in terms of proceeds from Canadian common-equity underwritings in the period, raising $1.9 billion. It led or co-led 39 underwriting transactions. It ranked first in block trades on the Toronto Stock Exchange and fifth in advising on M&A transactions.

The division focuses on seven sectors or areas — mining, oil & gas, industrials, technology and health care, non-bank financial services, telecommunications, cable and media — as well as on “special situations.” It does not plan to increase the number of sectors it covers but is strengthening and expanding its expertise in these areas. It has, for example, added alternative energy in its oil and gas coverage.

London-based GMP Europe, which started operations this year, not only gives clients access to European investors but is also expected to attract foreign companies interested in listing in Canada. Sullivan notes Australian companies listed on the London Stock Exchange’s AIM exchange for small and mid-sized companies are potential clients. Because many of the latter are resources companies, both TSE listings and GMP’s expertise in resources will be attractive. GMP Europe is 40%-owned by employees.

> Private Capital Management. EdgeStone, which manages more than $2 billion in private equity for institutional and HNW clients, was acquired for $62 million in cash and four million units of GMP, worth more than $90 million when the deal closed on July 4, 2006. The units are held in escrow and will be released over three years. GMP gets 100% of general management fees but shares performance fees with EdgeStone’s principals.

EdgeStone’s business is to provide capital, strategic direction, and business and financial advice to promising mid-market and early-stage companies. It manages three types of private-equity funds — later-stage equity, mezzanine equity and venture capital.

EdgeStone reported $12.3 million in revenue for the first six months and profit of $4.5 million.

> Wealth Management. The private-client business is a key part of GMP’s overall strategy as it allows GMP “to maintain relationships with clients for whom we have created wealth,” says Sullivan. “By providing them with viable wealth-preservation strategies, we keep these clients in the GMP family.”

GMP continues to build its private-client business. In 2005, it established a target of 100 advisor teams managing assets of $10 billion by 2010; currently, 31 teams manage $4.1 billion. The target of $100 million per team has already been exceeded.

Advisors get 50% of commissions and a portion of the company’s profits through share ownership. Sullivan believes this creates the only “true” entrepreneurial environment. “If you don’t have an equity stake, you aren’t an entrepreneur,” he says.

About a third of GMP’s investment advisors are licensed portfolio managers who offer discretionary investment management.

GMP Private Client also offers what Sullivan calls “a blend of external investment managers not typically available to retail inves-tors” through a separate managed-account program.

The wealth-management division reported $25 million in revenue in the six months and net income of $664,000. IE