What Is Merchant Banking?

Summary:

  • Focused on advice and underwriting for companies and wealthy individuals, typically with respect to unregistered securities
  • Historically focused on commodities, thus the term "merchant"
  • The term is often used interchangeably with the "Investment Banking", though there are slight differences

Merchant banking primarily involves financial advice and services for large corporations and wealthy individuals.

Merchant Banks

Merchant banks invest their own capital in client companies and provide fee-based advice services for mergers and acquisitions, among other services they provide.

Merchant banking practices take care of the needs of commercial international finance, stock underwriting, and long-term company loans. This type of bank primarily works with other merchant banks and financial institutions with its prominent role being that of stock underwriting, and the bank works in the realm of private equity where securities of a company are not available for public trading.

Of the most common private equity investment strategies, these include venture capital, leveraged buyouts, distressed investments, growth capital, and mezzanine capital. Leveraged buyouts generally obtain majority control over existing or mature firms, whereas growth capital and venture gains invest in younger or emerging corporations without obtaining the majority of control.

Merchant Banking Then and Now

Merchant banking began practice during the Middle Ages in Italy and was introduced by grain merchants, making them the original banks.

In today’s world, merchant banking involves many activities to include credit syndication, portfolio management, mergers and acquisitions counseling, and acceptance credit, etc. Today’s merchant banks do not have the same characteristics of their predecessors.


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