Pinnacle Wealth Brokers Inc.
Mention the name Pinnacle Wealth Brokers within investment circles and the first thing that often comes to mind is the company’s rapid ascension to the top peak of the financial services industry as one of Canada’s preeminent Exempt Market Dealers. This unique business model within the industry focuses solely on privately-raised capital from small and medium-sized enterprises. Private investments create opportunities to invest in the likes of real estate, insurance, mortgages and industrial projects without any form of public trading whatsoever.
The Calgary-based company has its roots dating back to 2006 and is led by its founder and highly entrepreneurial Chairman and CEO Darvin Zurfluh. As part of a hugely successful ongoing expansion campaign, Zurfluh and the company recently hit another grand slam by announcing the appointment of Brian Koscak as the new President and General Counsel. Koscak, a top-level securities lawyer who is known to have remarkable industry insights and innovative ideas, will work alongside Zurfluh in taking the enterprise to even greater heights. Koscak joins the Pinnacle team having been a partner at Cassels Brock & Blackwell LLP, a full-service law firm in Toronto, and is currently the Vice-Chair of the Private Capital Markets Association of Canada (PCMA) and a member of the Ontario Securities Commission’s (OSC) Exempt Market Advisory Committee.
The Canadian Business Journal recently had an opportunity to speak with Zurfluh, who graciously took time out of his holidays in British Columbia to discuss his company’s accomplishments and exciting new business plans coming up on the horizon.
Originally from Edmonton, Zurfluh moved to Calgary last year to be in the heart of the rapidly expanding private markets. In 2009, a new regulatory regime had taken hold, which is when Zurfluh made the bold but calculated decision to apply for an Exempt Market Dealer licence with the ultimate intention of expanding on an international scale. The past five years have resulted in a tremendously impressive growth phase for Pinnacle Wealth thanks to that decision.
The mandate of Pinnacle Wealth is to research excellent private investment opportunities for its registered dealing representatives, who in turn pass on those recommendations to their clients to pursue. The business has enjoyed consistent smart growth, allowing it to hold capital-raising power to attract excellent investment opportunities for its representatives and clients.
Since its inception, Pinnacle Wealth has worked to raise awareness of the private markets by driving legitimacy of the sector to the marketplace and into the mainstream consciousness of the general public. The financial model includes a mix of cash flow, tax savings, and equity offerings in order to gain alternative investments. Furthermore, Pinnacle Wealth embraces a holistic approach to wealth management since it will soon offer public securities as it has recently been registered as an Investment Fund Manager and Portfolio Manager in order to provide investment diversification for its clients. This is being led by Pinnacle Wealth’s new Chief Investment Officer, Wes Mills, who has three decades of wealth and portfolio management expertise with one of the Big Five banks in Toronto.
Pinnacle Wealth does its own in-house due diligence on deals that are looking to make it to its product shelf. To that end, Zurfluh and his executive team have gone out of their way to hire some of the best in-house Chartered Financial Analysts to look at third-party companies to make sure they “know-their-product” before it becomes available for retail distribution.
As part of this process, Pinnacle Wealth does background checks on the management team, reviews the issuer’s governance structure, financial model, business plan, capital needs and other matters while assessing whether the deal is good enough to sell to its clients, assuming investor demand. Zurfluh advises that “It takes a lot of work to identify great opportunities, perform due diligence and get a new offering going as well as training our Dealing Representatives on the investment. As an Exempt Market Dealer, we serve an important function in the eco-system of capital-raising since we are the matchmaker between the small and medium-sized private enterprises and the investors, who are looking at alternative investments.”
In some ways six years since the Exempt Market regime was introduced across Canada is a short period of time, but on the other hand it has also been more than enough time for the company to lay an excellent foundation and solid groundwork. Pinnacle Wealth was also a founding member of the National Exempt Market Association (NEMA) and Zurfluh served as an active director for the first three years in generating its successful launch.
For Zurfluh and Pinnacle Wealth, those first six years have also been a period full of regulatory changes and a number of daily obstacles that can definitely serve as detriments for free-wheeling growth, but he confirms that everything is on track for what they have strategically put in place through a well-designed business plan.
Zurfluh states that “the first six years was a time of building our core business, processes and field force of Dealing Representatives across Canada, consistent with our core values and vision. It has also given us the opportunity to find the right people and go through cycles of getting higher quality Dealing Representatives and advisors in our head office.”
As for expansion plans, Pinnacle Wealth has its eye on Ontario as a result of proposed changes to make it easier to raise capital in the province under a new prospectus exemption. As it currently stands, only accredited investors have access to Pinnacle Wealth investments in Ontario, but that will be amended later this fall when the country’s largest province finally allows Exempt Market Dealers to sell securities under a new Offering Memorandum Exemption. It is currently available across Canada, except Ontario. The Offering Memorandum Exemption will allow private market securities to be sold to qualified retail investors by providing them with a prescribed form of offering document and risk acknowledgement form. Both Zurfluh, through Pinnacle and MEMA, and Koscak, as Vice-Chair of the PCMA and in his capacity as a member of the OSC’s Exempt Market Advisory Committee, have been actively involved in working with securities regulators in revisions to the existing exemption in striking the right balance between investor protection and efficient capital markets.
Lloyd McDonald, VP Business Development, who has been with Zurfluh since 2010, will be leading Pinnacle’s expansion in Ontario with support from Carolyn Seaforth, VP Business Development Ontario.
“We’re poised to jump into the Ontario market,” Zurfluh confirms. “We have a strong presence there now relative to other Exempt Market Dealers, but I would say the majority of the population has no idea that the private market as a whole even exists.”
Several years ago Pinnacle Wealth began the process of expansion into Quebec and then the Maritimes, which has resulted in holding a significant presence as far east as Nova Scotia. Zurfluh says response has been particularly robust in the Maritimes where the company continues to acquire top-notch, experienced Dealing Representatives and Financial Advisors. Movement in Quebec has been a bit slower due to a number of unique challenges, not the least of which is the language issue, with the company having had to update their website with a French version along with several offering memorandums – the prospectus exempt documents.
“That is a lot of work and it slows down the process. Forms are constantly changing every few months but we really are focused on bigger growth in Quebec now,” Zurfluh confidently says.
Pinnacle Wealth has impressively expanded its footprint to a national presence in a very short period of time, with representation from Vancouver Island in the west all the way to Nova Scotia in the east. Also on the radar is international expansion.
“Our short term plan is focused on growing a strong Asian division, which has been very successful for us in the past few years,” Zurfluh remarks. “We are definitely the strongest in the exempt market by a long shot in the Asian division and so we are getting some investors coming from China and Hong Kong.
Traditional publicly-traded investments are for investors willing to put their money aside for the longer term. Such is also the case with exempt market investing. However, there continues to be expanding opportunities for shorter-term investments with less volatility and Pinnacle Wealth has taken action in that regard to ensure they have that area nicely covered as well. Lack of liquidity in the exempt market and higher risk investments is how it was introduced in the beginning and how the regulators see it, making it an ideal fit for high-risk investors. But Zurfluh does see some notable movement in that regard.
“That’s part of the reason why we brought on Wes Mills, who was a former CIO for Scotia Asset Management,” he says. “Wes is looking at helping us find and build portfolios of private product that is lower risk and we’re looking for investments that have the ability to be shorter term in nature, so people have to pull their money out after a year, for example. Whereas, if you’re investing in a traditional land investment you would never know if it’s going to be up or down a couple of years from now.”
Diversification has always been a critical core component in public investing and it’s every bit as important – and even more so – with this type of private business investment. Since 2009, there has been greater opportunity to invest in a much wider variety of investments in most provinces, whereas in the past it had largely been confined to such areas as real estate and oil and gas. Now there has been expansion into business loans and lending in a wide variety of categories. Because of the higher risk level, it is most sensible to embrace diversification.
Since 2009, most investors have leaned strongly towards income versus equity products and so there has been a noticeable shift away from real estate, which had until then, always been the No.1 go-to option. Zurfluh says the adjustment was most notably evident in Alberta.
“Now the biggest chunk of sales goes to factoring receivables and small business loans because they are shorter term in nature and there is a chance for liquidity. It’s made the risk level more acceptable for a lot of additional investors,” he says.
Utilization of technology is a paramount contributor to Pinnacle Wealth’s success objectives. Excellent back-office technology is essential to aiding in processing trades and client statements. The exempt market didn’t have any of that because the regulatory side just got it going in 2009.
“One of our main goals is to have everything paperless including an investor signing an electronic copy of all the documents they sign. As you’re signing it takes you through and highlights all the important segments and eliminates errors,” Zurfluh explains.
The entire team of experts at Pinnacle Wealth are dedicated to helping build the Offering Memorandums for investors. A concern of the past has been that when an offering memorandum was being built, it was prepared by the issuer and the issuer’s lawyers, meaning there were always protection mechanisms for the issuer but it wasn’t being built for the investor. Zurfluh tells us that Pinnacle Wealth is now operating alongside these issuers to build the offering memorandums so that the terms are favourable to the investor, including better security, out clauses and voting privileges being stronger and far more palatable.
“With Brian Koscak, our President and General Counsel joining, he truly brings a wealth of legal knowledge, transaction and compliance experience and a general business savvy that complements our team of corporate finance analysts. We believe with Brian’s involvement we will build even better offerings and documents and further protect our investor clients,” adds Zurfluh.
In the second half of 2015, Pinnacle Wealth is committed to focusing on two new products that the industry as a whole has been clamoring for, with respect to additional investment options. The first is a long-short equity fund being managed by Wes Mills. It will be the investment in public equities with superior risk-adjusted returns to something like the market itself. Zurfluh hopes to have that in place between the middle of September and the middle of October.
The second product is one in which Pinnacle Wealth is working with a third party fund manager for what Zurfluh and his executive team sees as the highest demand in the industry, namely a diversified private income fund.
“We’re going to be seeking unique opportunities that provide income from small and medium-sized businesses. Our research team sees a high degree of deal-flow; a lot of smaller businesses saying they need a $1 million to $5 million loan,” Zurfluh says. “That’s too small for us to create an offering memorandum around for them. But when we have a diversified fund and we’re raising money on a continuous basis, we’ll be able to put that into a fund if it makes sense and provide investors immediate diversification. You’re writing one investment ticket. Once it gets to the necessary size you’ll have more than 10 investments within one ticket.”
The first six years for Pinnacle Wealth as an Exempt Market Dealer has proven exceptionally rewarding for Zurfluh and the company. In a specialized industry that is still very much in its infancy, there stands an incredible amount of potential for growth not only here in Canada but worldwide. Zurfluh believes the company’s advancement in the next five years will be that much more impressive.
“We’re going to have greater opportunities for better diversification and better built offerings for investors, including investor protection,” he says. “We’re also an Investment Fund Manager and Portfolio Manager so we’re going to be utilizing that side of our business to create funds of third-party private investments that creates instant diversification and within five years I think we’ll have very attractive liquidity in the exempt market. There are lots of other players coming to help provide secondary trading in the private markets. It’s not there yet but, I do think within five years that will be there for investors.”