Did you watch the Battlestar Galactica Reboot a few years back? It was some really good science fiction. Vipers, Cylons, Starbuck, and of course the Battlestar Galactica….An analog ship in a digital world. Its lack of being internally and externally networked to the colonial fleet saved it during the initial Cylon assault, and launches the Battlestar on its epic quest for a new home. Great stuff!

A key piece of technology the Galactica utilized was the Dradis system – a really cool complicated kind of radar. Dradis stands for Direction, RAnge, and DIStance. While recently doing some scouting, looking for potential targets for the DTM5, I identified a company – RF Capital Group – that may be headed in the right direction, may, at some point be in the price ‘range’ , and may have a distance to go in terms of growth. Now for a closer look.

RF Capital was previously known as GMP Capital. GMP has been a bay street fixture for decades, although their size, influence and market price has been waning for some time. A firm that combined investment banking and wealth management, in recent times GMP never seemed to have the size, management capability or strategic direction to keep pace with a rapidly consolidating and increasingly bank dominated industry. GMP, partially owned and heavily influenced by the Richardson Family and Sons Conglomerate, has really missed the mark over the last decade. This has been a shareholders nightmare.

So, what is this doing as a potential target for the DTM5? Well, lets not get ahead of ourselves. This is a scouting mission. Not a shopping spree. CF Capital isn’t even on the bench yet.

However, what put it on the radar?

1. Over the past year CF has finally divested themselves of their investment banking business (to Steifel), so as to be able to focus on their wealth management business. Likely a good idea as wealth management (at scale) can be profitable, as revenue streams are more predictable, and it is cheaper and strategically easier to run. It also provided GMP with a nice cash injection.
2. The convoluted share structure whereby GMP only owned a part of their wealth management business has been corrected by RF acquiring the balance of the wealth management company’s shares from the Richardson Family. The result is a cleaner balance sheet and, in a restructured entity, potential profitability.
3. With a tight share ownership structure (Richardson family, insiders and management / advisors owning 68.5% of the company) there is better aligned interest with public shareholders.
4. The valuation of wealth management firms is fairly straightforward – and independent firms are always targets for consolidation, or at least easily understood by the market.
5. Demographics and industry trends are still favorable for wealth management companies.
6. And as you can see based on the chart above…..a bottom looks in.

So the ship has been turned in a better direction. But there are potential problems. Under the influence of the Richardson Family and existing board and management, this company has floundered. Family controlled asset managers / wealth management businesses (AGF.B anyone?) have shown an inability to compete against larger, better managed, more accountable competitors. The board of this company has done a disastrous job for shareholders over the past decade. Welcome to Canada LOL. There seem to be some minor changes taking place at the top, but none that suggest a true transformation is imminent.

My interest in this company as an investment isn’t based on my belief management is going to do a great job. Currently, its a pure market / valuation play. It is thinly traded, and I suspect will remain highly volatile. I’d have to see a major share price decline, and a couple other things, to consider taking a position.

An ideal situation is a global market sell off, driving markets into bear territory, declining RF’s Share price significantly. Small cap financials always get rougher treatment in a bear market. Then, it would have leverage to the upside based on demographics, industry consolidation and wealth management trends. Then, if management truly starts to execute – or is executed and changed out – we might have something here.

GLTA!