Merchant Banks

Q: What is a Merchant Bank?

A: A merchant bank partners with its clients to develop a life-cycle investment strategy at the onset of the relationship. The resulting capital, fiscal discipline, and operational guidance enables the client to experience growth, setting the stage for future opportunities.

Q: What is the history and origination of Merchant Banks?

A: Merchant banks were in fact the original "banks" of Europe, formed in the middle ages by Italian grain merchants. The Lombardy merchants and bankers grew in stature trading cereal crops. Many of the displaced Jews who had fled persecution from the Spanish Inquisition in the late 1400s entered the trade. They brought to the grain trade from the middle and far east along the Silk Road, ancient practices involving the financing of long distance trade goods. Lombardy (in Italian Lombardia) is a region in northern Italy between the Alps and the Po Valley. The Silk Road was an interconnected series of routes through Southern Asia traversed by caravan and ocean vessel, connecting Changan (today Xian), China, Antioch, Syria, as well as other trading territories.

Jewish people could not own land in Italy at that time, so they entered the great trading piazzas and halls of Lombardy alongside the local traders, setting up benches to trade in crops.
New Jewish merchants had an advantage over the locals as Christians were strictly forbidden the sin of usury. Usury (from the Latin usus, used) was defined originally as charging a fee for the use of money. Without such encumbrances, Jewish newcomers could lend to farmers against crops in the field, securing the grain sale rights against the eventual harvest. This practice grew into the advancement of monies against the delivery of grain shipped to distant ports. Profits were realized from the present discount against the future price. Both practices were in essence high risk loans considered usurious by the Church. Over time there arose a class of merchants no longer trading grain, but in its stead, traded grain debt. This developed from what was an ancient method of financing the long distance transport of goods.

Medieval Italian markets were disrupted by wars and became limited by the fractured nature of the Italian states. The next generation of bankers arose from migrant Jewish merchants in the wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for Italy, England, and the Netherlands.

This course of events set the stage for the rise of banking names which still resonate today: Schroder, Warburg, Rothschild, even the ill-fated Barings, were all the product of the continental grain trade, and indirectly, the establishment of Merchant Banking.

Q: How has Merchant Banking and Cat Trail transitioned to a new approach?

A: Today Merchant banks have transitioned away from their sixteenth century roots of direct lending towards a more active and hands-on investment banking approach. For example, Cat Trail offers financial solutions through a combination of advice and investment capital. It is based on this understanding of the evolution of the Merchant Bank that Cat Trail has developed its approach to Private Equity and Investment Banking, including long-term relationship building, active strategic planning, and prudent fiscal guidance for clients.

Q: What is the difference between a Merchant Bank and a Private Equity firm?

A: Merchant banks have became an important sector of capital markets filling the gap left by trading banks which are conservative by habit and subject to heavy government regulation. Many compare merchant banks to investment banks, because over the years merchant banks have moved away from direct lending. Today’s merchant bank activities are generally spread among active securities trading, derivative market plays, financing arrangements as well as assisting clients with active private equity investments. Merchant banks also advise on mergers and acquisitions, undertake limited project financing, and investment management, or underwrite short and medium-term corporate debt. By contrast, Private Equity firms raise large funds to make passive investment in assets where 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.