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What is Merchant Banking?
Merchant banking refers to a specialized area of financial services where institutions provide advisory, underwriting, fundraising, and investment services; primarily to large corporations, high‑net‑worth individuals, and sophisticated investors. Merchant banks focus on private equity, corporate finance, and international trade.
Definition
Merchant banking is the provision of financial services and investment support (including advisory, capital raising, and portfolio management) by specialized financial institutions to corporations and wealthy clients.
Key Takeaways
- Offers corporate finance and investment advisory services.
- Serves businesses, large investors, and high‑net‑worth individuals.
- Includes underwriting, fundraising, mergers and acquisitions support, and private equity investment.
Understanding Merchant Banking
Merchant banks originated in Europe as early financiers of trade and industry. Today, they operate similarly to investment banks but often focus on private equity, corporate advisory, and international trade financing.
They provide services such as:
- Capital raising (equity and debt)
- Mergers and acquisitions advisory
- Portfolio management
- Underwriting of securities
- Trade financing solutions
Merchant banks typically do not offer traditional retail banking services like checking or savings accounts.
Formula (If Applicable)
There is no specific formula, but the value of merchant banking is often measured through:
- Return on Investment (ROI) for clients
- Deal Size and Volume
- Assets Under Management (AUM)
Real-World Example
A merchant bank may assist a growing company with raising P500 million in private equity financing while advising on market entry and corporate restructuring.
Importance in Business or Economics
Merchant banking helps companies access capital, navigate complex transactions, and expand through mergers, acquisitions, and strategic investments. It supports economic growth by strengthening corporate finance and investment infrastructure.
Types or Variations
- Full‑Service Merchant Banks
- Boutique Corporate Advisory Firms
- Private Equity–Focused Merchant Banks
- Trade Financing Merchant Banks
Related Terms
- Investment Banking
- Private Equity
- Underwriting
Sources and Further Reading
- Investopedia – Merchant Bank
- BIS – Global Financial Markets
- Harvard Business School – Corporate Finance Resources
Quick Reference
- Provides corporate finance and investment services.
- Focuses on advisory, underwriting, and funding support.
- Serves corporations and high‑net‑worth clients.
Frequently Asked Questions (FAQs)
Are merchant banks the same as investment banks?
They overlap, but merchant banks traditionally focus more on private equity and trade finance.
Do merchant banks work with small businesses?
Typically no, they work with established firms or wealthy investors.
Do merchant banks take equity stakes in companies?
Yes, many provide private equity funding.
