The Millennial's guide to Gordon Capital, Jimmy Connacher and Neil Baker

A guide to the legendary Gordon Capital, the Big, Bad disruptor of the 80s... like The Wolf of Wall Street, but in a convenient blog post format.

More than just a business success, Gordon Capital was a legend built on dazzling dealmaking and flashy lifestyles, including drinking during trading hours, obviously.  Gordon Capital was founded as Gordon, Eberts in 1969 by Monty Gordon and Gordon Eberts.  Monty Gordon would later on in his career market hedge funds to his rich friends, including the ill-fated Lawrence Partners fund (ie Ravi Sood).  But the two key players behind the Gordon Capital legend were really Jimmy Connacher and Neil Baker, both "ostentatiously anti-establishment" Winnipeggers.  Jimmy Connacher was variously known as the Barracuda of Toronto or The Piranha.  Jim Connacher joined in 1970, after leaving Wood Gundy, frustrated by its slow-moving ways.

Gordon in the 70s was a brokerage, not an investment bank.  The firm grew rapidly thanks in large part to Connacher's drive and Gordon's pioneering of "block trading" in Canada.  That's where a broker buys a block of securities at a discount to market from an institution looking to unload.  This offers price certainty to the seller and transfers the market risk to the broker.  This approach propelled Gordon to be the largest volume trader in the 1980s, accounting for 15% of daily volume on the TSE.  But it still left them out of the lucrative underwriting business, which was controlled by high pedigree old-line firms operating in clubby ways.  Gordon had to be content just getting occasional crumbs thrown their way by this cartel.

One day, Gordon partners were complaining about being left out of a major energy financing, when someone said: "Why don't we just buy the goddamn thing? We're block traders, and this is just a big block."  This was the birth of the "bought deal", where an investment bank buys an entire financing using its own capital and bears market risk while placing the securities.  This approach offered the client both certainty and lower fees (2% vs the usual 4%).  The bought deal is what turbo-charged Gordon Capital's growth.  In 1984, RBC awarded a large preferred share issue to Gordon, cementing the bought deal as the new way companies raised capital.  RBC had traditionally used Wood Gundy for its financings, so Gordon had truly arrived.  It might be useful to know that banks were legally barred from underwriting securities at the time.

Putting their own capital at risk to get clients' deals done, rather than just being middlemen, required a strong balance sheet.  In 1984, Gordon pulled an audacious move to capitalize itself using foreign money.  At a time when the entire securities industry in Canada had about $1 billion in capital, Gordon raised $100m, twice as much as the balance sheets of the largest firms, Wood Gundy and Dominion Securities.  Gordon achieved this by taking on a foreign partner, the Belgian Groupe Bruxelles Lambert, which provided  half the money.  This involved exploiting a loophole in the law that otherwise restricted foreign ownership to 10%. Bruxelles Lambert, then as now, is majorly owned by Power Corporation, ie the people behind current Bay Street bugaboo, Wealthsimple.  Bruxelles Lambert also backed Michael Milken's firm.

We will price a deal on Friday afternoon and complete it on Monday morning. We are determined to drive a wedge into the comfortable, take-your-time, let’s-have-a-whole-new-bunch-of-meetings attitude of the cartel now handling most new financing.  - Neil Baker boasting about the Gordon way

With the advantages of low overhead, strong capital backing and speed, Gordon quickly invaded the underwriting business. Bell and other blue chips switched their allegiance to them. On some deals, Wood Gundy and Dominion Securities now worked for Gordon.  Gordon also counted Jack Cockwell of the Bronfmans' Edper Enterprises as a major backer and a secret weapon for backstopping many of their bought deals.  Edper was a predecessor of what became Brookfield Asset Management.  Connacher had done huge trades for Cockwell for many years.  Neil Baker had started in business working for Edper.  Edper and affiliates controlled over $100 billion in assets through pyramidal ownership structures and the use of super-voting shares.

In 1986, Gordon Capital came very close to merging with Wood Gundy, the firm Jimmy Connacher had left.  The deal would have displaced Dominion Securities as the largest securities company in Canada.  This would have been a stunning coronation for Gordon Capital, essentially taking over a poster child of the Establishment, while only having 10% of Wood Gundy's staff count.  This was described as a biker gang merging with a private club.  What sank the deal was partly due to word getting out about the bloodshed Gordon partners planned for what they considered the bloated Wood Gundy.

You can probably guess how this tale ends, since the name Gordon isn't around anymore.  The turn in the economy in the the early 90s that hobbled so many others also hurt Gordon.  The risks they took by offering price certainty to others caught up with them with some bad trades and bad deals.  That included a single trade that lost $120m.  There were also brushes with the law. Gordon tried and failed to raise $125m in capital for itself with its own employees - getting only 5% take-up.  By 1992, the partners decided to put up Gordon Capital for sale.

Remember how Gordon Capital used their balance sheet as a weapon to win deals? Who has enormous balance sheets?  Banks!  Foreign players! Regulations changed, allowing chartered banks to own brokerage houses and foreigners to own more than 10%.  And the banks and foreign players moved in, just look at the industry now.  Gordon Capital broke the old boys' club, but also unleashed forces that eventually caused its own demise.  The waves of disruption never cease!  Within a matter of years, all the independent names that had been around for decades would be under Big Bank ownership.  Gordon itself fizzled into irrelevance.  Never underestimate the relentless growth of Canadian banks!

Many Gordon alumni went on to have big roles at other firms, such as GMP, Paradigm Capital, etc.  Finally, who was the director of research of Gordon Capital?  None other than recurring OPM Wire character Avner Mandelman.  So next time I mention him, don't send me emails asking who he is.

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