Merchant banks work in a highly specialized area of finance. If a traditional commercial bank collects deposits and loans, investment banks offer services focused primarily on capital markets (underwriting bonds, shares and IPOs), and secondarily, on securities trading (trading and brokerage).
Its function is to assist institutional investors in managing risk coverage for their portfolio companies and to assist clients with financial instruments in the administration of their assets.
The activities can be classified into five different areas:
1. Investment banking services in the strict sense.
2. Corporate Finance
3. Structured Finance
4. Merchant Banking Services in the Strict Sense
5. Risk Management
1. Investment Banking Services in the Strict Sense: These services have historically been associated with merchant banks. These services typically take place in three stages, from the assistance provided to business customers through the issuance of shares and debt securities to the structuring of these services, from making decisions about how to finance their activities: Advising / arranging, distributing or selling securities.
a) Initial stage – issue and promotion
This is the stage during which stock or debt is issued. It is initiated by the financial intermediary with a strong promotional activities in enterprises, governments or financial institutions.
b) Consultant / Arrangement (Consultancy / Organization)
These are the organization of economic activities (pricing) and legal taxation.
c) distribution and sales (sales)
This stage includes activities in which securities are classes in the portfolio.
2. Corporate Finance: It is the stage of optimizing financial options for client firms with a strong advisory meaning which is an essential tool for corporate finance.
Processes that form the basis of corporate finance:
3. To raise the actual money or research funds required to carry out the operation. Typically, these are syndicated loans in which the investment bank acts as the administrator. This is a feature that differentiates investment banks from commercial banks;
4. Mergers and Acquisitions (M&As) of other companies;
5. Corporate restructuring, solving business difficulties.
3. Services in Structured Finance: Clients are services for organizing operations based on cash flows from defined activities or investment projects in the management of companies and are often “cocooned” in specially incorporated companies (special purpose vehicles). This family of services also includes those for finding resources for implementing programs:
One. project financing
C. Leveraged finance operations and leveraged buy-outs are among the best-known).
4. Merchant Banking Services: These services refer to the acquisition of holdings in equity of non-financial companies. For example, investing funds of a single financial intermediary (business model of a bank) or funds administered and managed by a financial intermediary.
5. Risk Management: There are two separate, but related branches of this business field.
One. The first refers to products and services for risk management (interest rate, foreign exchange, credit).
B. The second relates to research on models for measuring and managing market risk and credit risk.
In a world of words, choose the right one!