The market for initial public offerings has evolved dramatically in the past decade.
Investment bankers have become increasingly creative with the structure and substance of IPOs, turning a traditionally flighty part of the market into a solid source of fees.

Investment Executive has been tracking the Canadian IPO market for more than a decade, estimating the underwriting fees — using the bonus credit method — that investment dealers earn on the IPOs they bring to market. The total commission earned on the deal is divided equally among all the participating underwriters, with the lead underwriter getting a double share.

While there are different definitions of what constitutes an IPO, IE accepts the classifications of the Toronto Stock Exchange. We calculate the commission on each deal classified as an IPO completed on either the senior market or the TSX Venture Exchange in 2004. We then total the estimated commissions for each firm for the full year to arrive at a ranking of underwriters.

On this basis, CIBC World Markets Inc.
emerges as IE’s top IPO underwriter for 2004. CIBC far outpaced the rest of the field, and is the only firm with more than $100 million in total estimated commissions. BMO Nesbitt Burns Inc. was a rather distant second, followed closely by RBC Dominion Securities Inc. A step below, TD Securities Inc. edged out National Bank Financial Ltd.
for fourth spot overall.

CIBC dominated the IPO underwriting business in 2004 due mainly to its prominence in the income trust area, the primary source of IPOs on the TSX last year.
It had a hand in an incredible 87 deals, and led 35. The vast majority were income-generating products, such as income funds, income trusts, income-participation securities, income-deposit securities and split vehicles. CIBC also led the odd traditional IPO, too, including one for rival investment dealer, Vancouver-based Canaccord Capital Inc.

CIBC’s many lead assignments were critical to overall its edge in the IPO market. Its closest rival, Nesbitt Burns, was also involved in a huge number of deals in 2004 (79), but led only 12. But if you drop out the slew of income offerings in 2004 and focus solely on traditional common equity IPOs, Nesbitt Burns steps ahead of CIBC in our underwriter rankings.

Looking solely at traditional IPOs, DS holds onto third, but NBF moves up into fourth spot, nudging TD to fifth. A few new firms also join the rankings once the overwhelming influence of income trusts is filtered out. Merrill Lynch Canada Inc. clocks in at sixth — when it sold its retail franchise to CIBC, much of its ability to play in the retail-focused income trust IPO explosion went with it. Similarly, GMP Capital Corp., which is in the midst of building retail capability, also appears in the traditional IPO rankings, in eighth place.

If TSXV underwritings are included in the traditional IPO rankings, Canaccord vaults into the top five, knocking bank-owned dealers TD Securities and Scotia Capital Inc. to sixth and eighth, respectively.

Nevertheless, the assorted income-focused vehicles do count as IPOs nowadays, and CIBC is the clear underwriting leader when all of the deals are considered. The happy consequence of leading numerous large deals is that it generates proportionately large underwriting fees. To get a sense of how much the fees have grown, consider that CIBC also led our overall underwriter rankings in 1994, when it was known as CIBC Wood Gundy and before the income trust phenomenon. Back then, IE estimated its market-leading underwriting fees at less than $20 million, less than a fifth of our 2004 estimate.

The growth is largely in line with the overall expansion of the IPO market itself. In 1994, slightly more than $3 billion in new equity came to market vs more than $17 billion in 2004 — again, largely due to the proliferation of income-generating securities. In turn, the growth essentially quintupled the size of the IPO underwriting pie.

Notwithstanding CIBC’s clear lead over the field, the growth of the market hasn’t been accompanied by increased concentration among the top underwriters. In fact, much of the largesse generated by the income securities boom appears to be filtering down to the smaller players.

While the top underwriter’s estimated commissions increased by a factor of five in the past 10 years, the underwriter that is 11th in our tables has seen its estimated commissions jump eightfold since 1994.
The large number of big deals moving through the market often requires big underwriting syndicates, particularly as many of the issues are targeted toward retail investors. In turn, the underwriting wealth moves down the chain.