A combination of impeccable timing and shrewd business execution at Canaccord Capital Inc. is helping the Vancouver-based brokerage build a unique transatlantic strategy that is boosting profits and providing diversity for its operations.

The effort is also getting a rousing ovation from investors. The independent investment dealer’s stock has almost doubled since the middle of last summer. A share recently traded around $18, and two analysts who cover the company recently raised their target price to $20 after the stock powered through their estimates.

Why is the market so keen? For a start, Canadian stock markets have been booming, particularly the resources sector, which typically spells strong deal flows and higher income from trading fees at all brokerages.

There is also the prospect of Canaccord converting to an income trust. Now that rival GMP Capital Corp. has done so, the pressure is building for Canaccord to follow suit. The firm was an outspoken critic of the federal government’s efforts to tinker with income trust taxation last year, not because it was actively seeking conversion itself, but because it has profited so handsomely from the trust phenomenon. But once a company converts to a trust and realizes a lower cost of capital, the pressure is on for its immediate competitors to step in line. Canaccord is still in growth mode, however, and may not be a candidate for conversion.

In the meantime, the more appealing long-term story is the firm’s business strategy, which incorporates a niche global wholesale business (investment banking, sales and trading), with operations in Canada, Britain and the U.S., along with a strong, independent retail shop in Canada.

Canaccord has been building its presence in Britain for a number of years, a process that began with its acquisition of a stake in T. Hoare & Co. Ltd. in 1993; it took 100% ownership in 1999. Last August, the firm took another important step with the purchase of Boston-based investment bank Adams Harkness Financial Group Inc. , a deal that closed in January.

The result is a capital markets division, rebranded as Canaccord Adams, that is well positioned to compete for small and mid-cap underwriting business at home and in two of the biggest foreign markets.

Peter Brown, chairman and CEO, said in a recent conference call with analysts that the firm’s vision is to offer issuers distribution in all three markets, and to offer buy-side clients access to venture underwritings in the same markets.

The Adams deal helps diversify Canaccord geographically and broadens its sector focus. Adams brings expertise in the technology, health-care and consumer sectors; Canaccord’s domestic strength, along with much of the rest of the Canadian marketplace in the past few years, has been resources and income trusts. The combination gives the firm sector expertise and exposure in new territory.

Perhaps just as important, the deal creates a pipeline from the increasingly hostile U.S. venture market to the venture-friendly British market. Canaccord has been a pioneer of the London-based venture exchange, known as the Alternative Investment Market. For the past few years it has been touting the virtues of the AIM, saying the market offers access to large pools of capital in Britain and the rest of Europe and imposes minimal regulatory requirements on issuers, placing most of the responsibility on advisors instead.

The exact opposite trend has been taking place in North America. Smaller companies in Canada and the U.S. are complaining about the rising cost of being public, thanks to the regulatory revolution wrought by the Sarbanes-Oxley Act in the U.S. Canadian regulators have largely followed the U.S. lead by introducing corporate governance rules that are rapidly boosting compliance costs. There are some carve-outs for smaller firms in Canada, however, and regulators have yet to decide what to do about internal control reporting, which has proven the most onerous part of the new rules in the U.S. Companies listed in the U.S. have felt the full force of regulatory reform.

For some firms, rising costs in North America may be reaching the point at which they outweigh the advantages of a listing. As intrusive regulation threatens to stifle the appeal of a U.S. listing, more companies may be willing to contemplate a public listing in a less oppressive regulatory environment, even if it is the AIM or other upstart small-cap markets that are getting off the ground in Europe.

@page_break@Michael Greenwood, Canaccord’s president and chief operating officer, says the firm is “receiving many unsolicited inquiries from U.S. companies that wish to go public, but not in the U.S. under Sarbanes Oxley.”

It is hard to say to what extent onerous regulation is driving companies to list in Britain, but what is clear is that the AIM has been one of the London Stock Exchange’s success stories. December was the AIM’s best month ever, with 48 initial public offerings that raised £1.8 billion. Throughout 2005, there were 335 IPOs, representing the bulk of the 421 IPOs on the LSE during the year. The offerings raised £16.2 billion, the biggest year for IPOs on the LSE since 2000.

The action comes at a time when the U.S. venture market is slowing. Data from Venture Economics shows there were only 56 venture-backed IPOs in the U.S. last year, down from 93 in 2004, and the total deal value dropped to around US$4.5 billion from about US$10.9 billion.

In Canada, the venture market remains much stronger, no doubt fuelled by the resources boom. In 2005, a total of $6.2 billion in equities — including IPOs, secondary offerings and private placements — was raised on the TSX Venture Exchange Inc. , up from $4.2 billion in 2004.

Nevertheless, the AIM’s success has resulted in a fierce fight among the venture markets, as they campaign on one another’s turf for listings. In early February, Nasdaq held its first conference for small cap issuers in London. If nothing else, that’s a sign that competition is heating up.

Canaccord, which is essentially straddling all the key markets, appears to be well-positioned. It can take advantage of the resources boom in Canada for as long as that lasts, act as a catalyst for regulatory arbitrage by offering North American firms a way onto the AIM, and bolster its strength in technology and other non-resources sectors, to provide a cushion when the commodity cycle takes a turn.

If the company’s latest financials are anything to go by, the strategy is working. For the quarter ended Dec. 31, 2005, Canaccord beat analysts’ expectations on both revenue and earnings per share, generating a return on equity in excess of 40%, as revenue jumped 28.3% from the same quarter a year ago. Net profit was 44.8% higher than the same period a year earlier.

The bulk of the gains can be attributed to the firm’s global capital markets business, which saw its pretax income rise 57.4%, compared with a gain of less than 5% for the retail business. In absolute terms, the wholesale business delivered more than double the income generated by the retail business in the quarter.

Indeed, in its latest quarter, the firm handled the two largest transactions in its history, raising $504 million for UrAsia Energy (BVI) Ltd. on the TSX, and $453 million for NETeller PLC on the AIM. It also raised $130 million for Yamana Gold Inc. and $80 million for Intermap Technologies Corp. through TSX deals.

Breaking it down by geography, Canaccord’s Britain-based business recorded almost $16 million in pre-tax income in the latest quarter, compared with $20 million for the Canadian operations, yet the British operation employs only 76 people, compared with 220 in the Canadian investment banking business, and more than 1,200 in Canada overall. This reflects the fact that the company can do bigger deals in Britain, and get a bigger share of the underwriting, suggesting that it is getting plenty of bang for its buck from its foreign ventures.

It remains to be seen how well the newly acquired U.S. operations will dovetail with the existing investment banking business, and whether the combination will act as a catalyst for U.S. small caps fleeing excessive regulation. The company says the integration is going very well, and that the cultures of Canaccord and Adams are highly complimentary.

The big risk for all brokerage firms is the health of the capital markets in general. But Canaccord, with more markets and sectors to play in than most, should be better equipped than others to roll with any punches. IE