A New Approach, With Ancient Roots, to Help Small Businesses

To this day, Bart Mitchell is not entirely sure he knows what a merchant bank is. “I guess I think of it as the old-fashioned banker who takes the time to listen to his customer’s needs and help them solve their problems,” he said. (Actually, that is not far off.)

Skip to next paragraphOne thing he is certain about is that if not for Next Street, a four-year-old, 22-employee merchant bank with offices in Boston and New York, his development company would have been in big trouble.

This year, in the teeth of the worst commercial real estate and lending crisis in a quarter century, Mitchell Properties managed to secure $5.7 million in long-term financing for an 84-unit condominium and retail complex in Boston’s mixed-income South End.

The financing, arranged through U.S. Bank and a mind-numbingly complex public-private sector loan program known as the New Market Tax Credit, essentially retired $1.7 million of construction debt, shaving about $20,000 off the project’s monthly loan payments. For Mitchell Properties, it was probably the difference between surviving the recession relatively unscathed and contributing to the growing list of belly-up real estate projects.

“I don’t know what we would have done,” Mr. Mitchell said. “In general, the projects that qualify for the program are much bigger than ours, but Next Street knew all the parties and was able to put the pieces together.”

It is a common refrain for Next Street clients, by and large established businesses with $5 million to $50 million in annual revenue.

The chief executives of these companies, which include a Boston-area moving business with as many as 400 seasonal employees, a major supplier of refurbished toner cartridges, and a manufacturer of truck batteries that meet California’s stringent new idling restrictions, report that Next Street fills a vital role for their organizations.

More than one has said that its blend of Fortune-500-level advice and access to sophisticated financing could be a solution to the small-business credit squeeze threatening to derail the economic recovery.

That is what makes Next Street intriguing: It may be the only small-business merchant bank in the country.

“We wish there were more,” said Tim Ferguson, the British-born co-founder and partner of Next Street. “And we’ve looked, but, with the exception of a few specializing in alternative energy and biotech, we haven’t found any.”

Although most people have only a vague notion of what the term means, at one time many of the dominant financial institutions in the world were merchant banks: Rothschild, M.M. Warburg, J.P. Morgan, Lazard, Hambros and Barings.

The great merchant bankers advised kings and railroad barons, bankrolled the Dutch East India Company and the California gold rush, and underwrote the bonds for North Sea oil drilling. Of that group, just Rothschild and Lazard operate in anything approaching their old form. And neither is likely to touch a client with less than half a billion dollars a year in annual revenue.

Nonetheless, to Mr. Ferguson, who started his career at Hambros, the classic merchant-banking formula of trusted advice and access to growth capital seemed to be exactly what the small businesses in his adopted country were missing.

In the summer of 2005, the banker, now 52, was serving out a noncompete agreement after a long time as senior managing director at Putnam Investments and sitting on nonprofit boards advising small businesses in working-class neighborhoods of Boston.

When he learned how many of the companies used credit cards as their capital, he called a fellow board member, Ronald L. Walker, then at Sovereign Bank and one of the most senior African-American commercial lending executives in New England, and asked what he thought about starting a small-business merchant bank and whether there would be enough clients.

“My first reaction was, ‘What’s a merchant bank?’ ” Mr. Walker said. “But my second reaction, because I ran the small-business portfolio at Sovereign, was, absolutely, there were plenty of businesses who’d be interested.”

Today, the bank lists more than 50 companies as clients. Much of its time, especially in the early stages of a relationship, is spent encouraging entrepreneurs to challenge assumptions about their operations.

“You’d be amazed at how often, when you ask a business owner what’s the most profitable area of your business, they don’t know,” Mr. Walker said. “They know what areas bring in the most revenue, but when you really break down their cost structure and profit margins, it’s a revelation.”

The merchant bank’s services, which are usually billed on a retainer ranging from $5,000 to $25,000 a month, run the gamut from big-picture strategy of the sort offered by a McKinsey & Company or Bain & Company to organizational psychology to the kind of intimate, delicate counsel usually tendered only by the closest consigliere.

Last fall, for example, Beth Williams, chief executive of Roxbury Technology, the remanufacturer of toner cartridges, called on Next Street to help her deal with the discovery that a senior executive had embezzled half a million dollars. “My first call was to my lawyer,” she said. “My second was to Next Street.”

Another client, Larry O’Toole, chief executive of Gentle Giant Moving, relied on Next Street to manage the hiring process after his longtime chief financial officer was wooed away.

“I don’t have formal financial training, so I lean heavily on my C.F.O.,” Mr. O’Toole said. “I got 70 résumés in. They all looked great to me, but the person they found was incredible. In fact, he’s really more of a Fortune 400 C.F.O. who’d be making $400,000 a year but, fortunately for me, had already done the big-company thing.”

Clearly, though, capital remains a priority. The majority of job creation is predicted to come from small companies in the years ahead. The Obama administration has acknowledged the prospect by holding a White House meeting on the issue recently and unveiling several programs aimed at encouraging banks to lend. As the Mitchell Properties example illustrates, however, that the programs exist does not mean private-sector companies will figure out how to exploit them without intermediaries like Next Street.

Like the merchant banks of old, Next Street is also putting its own capital to work. Several early loans totaling roughly $5 million were made directly off the bank’s balance sheet, and it is raising a $100 million small-business investment fund.

Next Street is the first to concede, though, that its model can be done on a large scale only if other investors participate. It is interesting to note that even the recent commitment by Goldman Sachs of $500 million for small-business education, loans and grants is primarily coming from the investment bank’s foundation. It is an act of charity (and a grand public relations gesture), not investment banking.

“We feel strongly that the small-business market deserves access to the same level of advice and capital as larger companies,” Mr. Ferguson said. “But, until now, the attitude has been, why focus on it? The deals are too small. We can’t make enough money.”

It is a provocative proposal for addressing the nation’s employment and small-business credit crisis: Bring back the merchant bank — and, of course, explain what it is.