What exactly does merchant banking mean? First of all, when someone speaks of raising equity, we normally think of registered securities (stock) being sold to the public by an investment banker (stockbroker). But stock doesn't have to be registered with the SEC to be sold, as long as it is sold privately to very sophisticated and suitable (think: rich) investors. For example, an angel investor (a private venture capital investor) making an investment in a start-up company buys unregistered stock privately. Merchant banking is when a bank or financial institution privately negotiates with the owner of a company and then makes a private equity investment in the unregistered securities of a privately held or public company. Usually it is the holding company of a bank that is making the investment. For example, let's say that twenty years ago a few doctors and wealthy investors got together and said, "Let's form a bank". They first form a bank holding company, and then they form the bank as a subsidiary. Suppose the bank prospers and makes a ton of dough. The profits are passed up to the parent company, and now the parent company is sitting on a big pile of money. Now the bank holding company could use the money to make loans, but that is really boring. The owners of the bank are already rich, and what they really want are even larger yachts. So they start making higher risk investments in the stock of promising companies. If the venture fails, no problem. They will still have plenty of money left. But if the company succeeds, they might own 25% to 50% of the next Wal-Mart. They hit a home run. So merchant banking involves private equity investments. Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Categories of private equity investment include leveraged buyouts, venture capital, growth capital, angel investing, mezzanine capital and others. The reason that merchant banking is relevant to those of us in the commercial real estate finance field is that the money for mezzanine loans, preferred equity, and venture equity often comes from merchant banks. By the way, it has been my experience that the term "merchant banker" is often used by flim-flam men trying to pass themselves off as direct lenders. So few people actually know what the term merchant banking means that these con men seldom get questioned about their legitimacy. So when you hear that term being thrown around, be careful. The guy may be legitimate ... but maybe not. You can find hundreds of structured finance lenders on C-Loans.com. | 
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