Merchant bank to open in December

Quest Capital Alliance LLC, with 95 investors and $15 million in capital, will begin providing traditional merchant banking services to southwest Missouri and northwest Arkansas Dec. 1.

As the Ozarks' first independent merchant bank, Quest will invest in small- to medium-sized businesses in the Midwest with favorable long-term profits and growth potential.

Jay Burchfield, Steve Fox and Jack Stack are the three initial members of the new company's management committee and are investing a combined minimum of $750,000 in the merchant bank. Four additional committee members will be elected once the company gets off the ground. The three anticipate all seven management committee members will be investors.

Merchant banks are pools of capital, typically organized as limited liability companies or limited partnerships, that invest in companies and businesses that represent the opportunity for a high rate of return over a defined period of time, usually five to seven years.

The management of merchant banks fosters growth in the companies they invest in through their involvement in the companies' management, strategic marketing and planning.

Merchant banks may also be defined as a type of mutual fund investing in private equities. Merchant banking is considered a high risk and high return asset class for sophisticated investors with long-term interests.

Fox, who in September left Bank of America after 12 years as a senior lender and market executive, is acting as the chief executive officer and general manager of the company. He said because merchant banks do not accept deposits, they are not regulated or chartered.

The company was organized as a Missouri limited liability company Oct. 3 and will be affiliated with many of the same community banks in southwest Missouri and northwest Arkansas that are also affiliated with Trust Company of the Ozarks.

"They will be investors in our merchant bank as well as referral sources," Fox said. "We see ourselves as being complementary and in fact, in a lot of situations, we'll be involved in transactions right alongside the commercial banks."

The types of transactions the new company will focus on include management buyouts, leveraged buyouts, employee stock ownership plans, recapitalizations, capital for expansion and start-up through later-stage venture capital investments.

"We're not really looking at total start-up deals. We want to get into a deal with a product and some kind of a customer base established, as opposed to just straight seed capital," Fox said. "That's not to say that we wouldn't do one, but that's really not the niche we're trying to fill."

Fox said the time is ripe for an independent merchant bank in southwest Missouri because of the region's need for private equity investing as a result of the entrepreneurial economy and commercial banks raising loan standards.

"Capital shortage is the major challenge facing entrepreneurs," Fox said. "We are also going to provide management assistance, which is direly needed. The other thing we're seeing is the banks starting to tighten credit. We're not competing directly with banks, but as they raise their standards, there are more and more people who need money."

Burchfield is the chairman of both Trust Company of the Ozarks and City Bancorp, which is the holding company for The Bank.

He said Quest will allow independent banks to take advantage of the Financial Services Modernization Act of 1999, which became effective in March and marked the end of the Glass-Steagall Act, the Depression-era measure that separated the banking and securities industries.

"Regulations have changed to allow banks to invest in organizations like the merchant banks, or to establish their own merchant banking operations. That's where the strategic alliance comes in Êto complement the independent community banks that don't have the resources and abilities to do this themselves," Burchfield said.

Most large banks have merchant banking operations. With Quest, investor banks can refer deals to the merchant bank and maintain the traditional banking relationship.

In addition to receiving a referral fee, the investor banks may also participate in market appreciation through equity positions taken by the merchant bank.

Burchfield said Quest has raised $6.5 million from 40 private investors so far.

He said many of the community banks planning to invest with the merchant bank are awaiting board approval to proceed with their investments, and that he expects to meet Quest's goal of 95 investors and $15 million in capital within the next few weeks.

There will be no public offering of interests in the company membership will be limited to 95 investors who will invest a minimum of $100,000 and a maximum of $750,000 with Quest, Burchfield said.