In general terms, we operate as a “Merchant Banker.” This is a European concept that can best be understood by what it is not. A Merchant Banker is not an Investment Banker, who raises money for companies by doing underwritings into the public market. A Merchant Banker is not a Commercial Banker, who just lends money for an interest rate return. A Merchant Banker is a securities focused holding company that lends and invests its own funds. We expect to create investment capital through either retained earnings or through consulting services. A Merchant Banker takes different risks then either an Investment Banker or a Commercial Banker, but is still a type of financial intermediary. Merchant Bankers may take an active role in their investees' financial activities. Our intent is that the greater our percentage ownership, the more active a role we will take. In certain instances, we may also act as an advisor or investment banker regarding arranging mergers or sale of our Portfolio Companies.
This type of merchant banking activity was generally suppressed in the United States by the securities acts passed between 1933 and 1940. Merchant Banking has reappeared in the form of high-technology oriented, venture capital partnerships and leverage buyout partnerships but it is difficult for these entities to have public stock except as a highly regulated company. We believe few companies focus on the segment of the market that we have chosen (i.e., smaller, financially troubled or early stage public companies).
Our management has significant and valuable experience in our chosen market of small public companies, particularly those that are financially troubled and those in the software business. We believe the public market offers opportunities for higher returns and the ability to realize these returns because of the liquidity offered by public stock. By specifically maintaining an organization that avoids the regulation of the 40 Act, we believe we offer investors an attractive mix of investment attributes.
We expect that a majority of our returns and revenues will arise from the appreciation in value of our Equity Participations. However, we also regularly charge our Portfolio Companies cash consulting, advisory and management fees and generally strive to cover our out-of-pocket expenses, as they would relate to a particular Portfolio Company investment. Charging an initial monthly consulting fee also serves as a preliminary screen to keep us from being overwhelmed with potential investments, provides leverage to obtain a larger equity position and minimizes our downside risk.
Our personnel may provide consulting services for our Portfolio Companies. Since our growth portfolio is primarily public companies and/or high growth companies, such companies need a more sophisticated financial officer. More than likely, however, these companies are unable to support the expense of such a qualified individual. Therefore, we may perform these functions until such time as the companies' volume or sophistication requires the expansion of the management team with a fully qualified CFO.
© Copyright 2015 by Aztoré Capital Corp.