A guide to the legendary Gordon Capital, the “Big Bad Disruptor” of the 1980s.
Gordon Capital was more than just a business success. It was a legend that was built on slick deals and flashy lifestyles, like drinking during trading hours. Monty Gordon and Gordon Eberts started Gordon Capital in 1969 as Gordon, Eberts.
Later in his career, Monty Gordon would sell hedge funds to his wealthy friends. One of these funds, the Lawrence Partners fund, was doomed to fail (ie Ravi Sood). But Jimmy Connacher and Neil Baker, two “ostentatiously anti-establishment” Winnipeggers, were the two most important people behind the Gordon Capital myth.
Jimmy Connacher was called the Barracuda of Toronto or The Piranha at different times. Jim Connacher joined in 1970. He had left Wood Gundy because it moved too slowly.
Gordon was not an investment bank in the 1970s. Instead, it was a brokerage. The company grew quickly, thanks in large part to Connacher’s drive and Gordon’s work as the first person in Canada to do “block trading.” This is when a broker buys a block of securities from an institution that wants to sell them for less than what they are worth on the market.
This gives the seller a sure price and puts the market risk on the broker. Gordon became the biggest trader in the 1980s because he used this method. He was responsible for 15% of the daily volume on the TSE. But that didn’t let them get into the lucrative underwriting business, which was run by old-line firms with a good reputation that worked in a clubby way. Gordon had to be happy with getting crumbs from this cartel every now and then.
One day, Gordon partners were upset that they weren’t able to take part in a big energy deal. Then someone said: “Why don’t we just go ahead and buy it? We trade in blocks, and this is one big block.” This was the start of the “bought deal,” in which an investment bank buys a whole financing with its own money and takes on the market risk while putting the securities on the market.
This method gave the client security and lower fees (2% instead of the usual 4%). Gordon Capital’s growth was sped up by the deal it bought. In 1984, RBC gave Gordon a large number of preferred shares. This made the bought deal the new way for companies to get money. RBC had always done its financing through Wood Gundy, so Gordon had really arrived. At the time, it might be helpful to know that banks were not allowed by law to sell securities.
To be more than just middlemen and put their own money at risk to get deals done for clients, they needed a strong balance sheet. In 1984, Gordon did something risky to raise money by using money from other countries.
At a time when the entire Canadian securities industry had about $1 billion in capital, Gordon raised $100 million, which was twice as much as the largest firms, Wood Gundy and Dominion Securities. Gordon did this by bringing in a foreign partner, the Belgian Groupe Bruxelles Lambert, which put up half the money.
This was done by using a hole in the law that let them get around the 10% limit on foreign ownership. Brussels Lambert was mostly owned by Power Corporation, which is the same company that owns Wealthsimple, which is a big deal on Bay Street right now. Bruxelles Lambert supported Michael Milken’s company as well.
On Friday afternoon, we’ll price a deal, and on Monday morning, we’ll finish it. We are determined to break up the cartel that is in charge of most new financing and has a “take your time, let’s have a bunch of new meetings” attitude. Neil Baker bragged about how Gordon does things.
Gordon quickly got into the underwriting business because he had low costs, a strong capital base, and speed. Bell and other large companies switched to them. Wood Gundy and Dominion Securities now work for Gordon on some deals. Gordon also counted Jack Cockwell of the Bronfmans’ Edper Enterprises as a major backer and a secret weapon who backed up many of their bought deals.
Brookfield Asset Management grew out of what used to be Edper. For many years, Connacher made big deals for Cockwell. Neil Baker’s business career began when he worked for Edper. Through pyramidal ownership structures and the use of super-voting shares, Edper and its partners were in charge of more than $100 billion in assets.
In 1986, Jimmy Connacher’s old company, Wood Gundy, was almost merged with Gordon Capital. Dominion Securities would have lost its spot as Canada’s biggest securities company if the deal had gone through.
This would have been a stunning way for Gordon Capital to come out on top, since they would have taken over a symbol of the Establishment while having only 10% of Wood Gundy’s staff. It was said that a biker gang and a private club were coming together. Part of what killed the deal was that word got out that Gordon’s partners planned to kill Wood Gundy, who they thought was too fat.
Since Gordon is no longer around, you can probably figure out how this story ends. The change in the economy at the beginning of the 1990s, which hurt so many other people, also hurt Gordon. Some bad trades and deals happened because they took risks by giving others price certainty.
One trade alone cost them $120 million. They also had close calls with the law. Gordon tried to raise $125 million in capital from its own employees, but only 5% of them signed up. In 1992, Gordon Capital’s partners decided to put it up for sale.
Remember how Gordon Capital won deals by using their balance sheet as a weapon? Who has huge financial records? Banks! Players from abroad! Changes to the rules made it possible for chartered banks to own brokerage firms and for foreigners to own more than 10%. And banks and companies from other countries moved in. Look at the industry now.
Gordon Capital broke up the old boys’ club, but it also set in motion things that led to its own downfall. There are always new waves of trouble! Within a few years, the Big Banks would own all the independent names that had been around for decades. Gordon himself lost all importance. Don’t ever think that Canadian banks won’t keep growing.
Many people who graduated from Gordon went on to play important roles at other companies, like GMP, Paradigm Capital, etc. Lastly, who was Gordon Capital’s director of research? Avner Mandelman, who appears in more than one episode of OPM Wire.