The merchant banks operate in the highly specialized field of finance. If the traditional commercial bank gathers deposits and loans, investment banks offer a range of services focused primarily on capital markets (underwriting bonds, shares and IPOs), and secondly, on the trading of securities (trading and brokerage).
Its functions are to assist institutional investors in managing the risk coverage for their portfolio companies and to assist clients with financial instruments in the governance of their assets.
Activities can be classified in five different areas:
1. Investment banking services in strictest sense.
2. Corporate finance
3. Structured finance
4. Merchant banking services in strictest sense
5. Risk management
1. Investment banking services in the strictest sense: these services are historically associated with the merchant bank. These services range from support provided to business customers in deciding on how to finance their activities, by issuing shares and debt securities up to the structuring of these services is generally in three phases: preliminary stage, advisory / arranging, distributing or selling of securities issued.
a) Preliminary stage – issue and promotion
This is the phase during which stock or debt is issued. It is triggered by the financial intermediary with a strong promotion activities at enterprises, Governments or financial institutions.
b) Advisory / arranging (consulting / organization)
These are Are the organization of economic activities (setting the pricing) and legal tax.
c) Distribution and selling (sale)
This phase include activities in which securities are classes in the portfolio.
2. Corporate finance: This is the stage for optimizing financial choices for client firms with a strong consultancy connotation which is an essential tool for corporate finance.
The processes which are the basis of corporate finance are:
3. Raising actual funds or research funds necessary to complete the operation. Typically, these are syndicated loans in which the investment bank acts as the arranger. This is a feature which differentiates the investment banks from commercial ones;
4. Mergers and Acquisitions (M & As) of other companies;
5. Corporate restructuring, solving business difficulties.
3. Services in structured finance: are services for organizing operations based on cash flows from activities or investment projects defined in the management of client companies and often “cocooned” in specially incorporated companies (special purpose vehicles). Also included in this family of services are those for finding resources for implementing the programs:
a. project financing
c. leverage finance operations and leveraged buy-outs being among the most famous).
4. Merchant banking services: these services refer to the acquisition of holdings in the equity of non-financial companies. For example, the investment of funds of the same financial intermediary (the bank’s business model) or funds administered and managed by the financial intermediary.
5. Risk Management: This business area has two different, but related, branches.
a. 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.
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