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David Goodman, the president and CEO of Dundee Corp.The Globe and Mail

Dundee Corp. has decided to remain a key stakeholder in its struggling capital markets business and inject money back into the unit – a move that has taken some observers by surprise.

In January, The Globe and Mail first reported Dundee's plans to spin out its capital markets division to its employees.

In August, Dundee's management said that it "may provide some capital by way of loans" in the new venture, but the exact form was unclear.

In a regulatory filing on Monday night, Dundee said it intends to inject capital via subordinated debt into Dundee Securities Ltd. that would match the amount its employees will contribute in the form of equity. Dundee Securities is currently fully owned by Dundee Corp.

Dundee did not specify the amount of the new capital infusion, but two sources close to the company said the figure will be roughly $17-million. In the filing, Dundee said the debt will be in the form of a revenue-based royalty.

"We will have cash-flow generation from our debenture and the business risk transfers to the guys who are running the business," David Goodman, chief executive officer of Dundee, said in a conference call with analysts and institutional investors on Tuesday.

Approximately 47 new equity partners have agreed to pay $15-million for the equity that Dundee owns in the capital markets business, according to two sources. When contacted by the Globe, Dundee declined to comment on the specific equity and debt amounts, citing confidentiality.

If the transaction is approved, Dundee will end up putting about $2-million more into Dundee Securities than it is cashing out.

In the conference call, Jayme Wiggins, chief investment officer with Intrepid Capital Funds, asked Mr. Goodman to justify why this was the best use of capital for Dundee, considering the capital markets business has been largely a money-losing venture.

"We think that this business is in its strongest form if the guys who are managing the business … are the owners," Mr. Goodman said.

"It hasn't been a profitable endeavour for us over the last 10 to 15 years … but restructured we think these guys have a really good opportunity to make money,"

What is unclear is whether the new partners at Dundee will be able to make a go of the business.

While the capital markets business has been losing money on a yearly basis, it turned a profit of just less than $400,000 in the third quarter,compared with a $5.6-million loss in the same period last year. Dundee saw its investment banking revenue for the quarter almost double to $7.6-million from $3.9-million. Revenue from institutional commissions also rose during the period.

Dundee historically has been tilted towards the resources market and much of its success or failure will be at the mercy of the price of metals and crude oil, according to observers.

Dundee has said it intends to complete the transaction before the end of the year, pending approval from the regulator and the approval of employees.

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