s many GS readers are aware, competition within the merchant banking industry has increased significantly. In the early 1980s, there were numerous opportunities to make strategic investments. Then came an era of recession, and financial institutions were forced to restrict lending practices. To overcome these challenges, one company has proactively identified investment opportunities through research on industries.

Based in Toronto, Clairvest Group Inc. has been providing merchant banking services since 1987. Its principal activity is investing in and partnering with the management teams of established businesses that have the potential to create above-average returns.

"We research industries that look interesting," says Clairvest vice president Michael Wagman. "We attend trade shows, meet with companies and see if they fit within our sphere of expertise."

That sphere of expertise includes the bankcard industry, specifically ISOs.

A few years ago, Wagman was performing due diligence on an ISO that eventually was sold to a consolidator. It was at that time that Clairvest began to consider ISOs as investment opportunities.

"We like the way the ISOs fit our model," Wagman says. "We like the fact that they are a sales organization and every time an ISO puts on a new account, if they are monitoring that account, the margins go up."

Then, recently, Wagman noticed that "a lot of the entrepreneurs who left the industry a few years ago are coming back as their non-compete agreements expire. Now is a good time to work with someone who has a good track record and wants to build a new ISO."

But not everyone who needs cash can just step right up. Clairvest doesn't necessarily invest in new ventures. It prefers companies that have proved they can build a business and want Clairvest to take them to the next level. In other words, they need to already have positive cash flow.

Another Clairvest stipulation for ISOs is that they have 15,000 or 20,000 accounts.

"They have to show that they've built their organization. Then we can help get them the financing and expertise to get them to the next level," Wagman says.

Clairvest officials anticipate continued growth in the merchant banking industry and believe that the market for relatively small transactions (i.e., less than $10 million) is particularly competitive; at the same time, they say that the competition for transaction sizes of more than $50 million is increasing.

By focusing on the midsize market (i.e., $10 million to $30 million), Clairvest is able to identify, understand and assist entrepreneurs to accelerate the development of their companies. "The growth is still there. If it's not on the credit card side, it's on the smart card side or the debit card side, and on the Internet side for sure," Wagman says.

Certainly, any ISO would be intrigued by the idea of a willing investor. But what, you may be asking yourself, is an "above average" return?

Well, how about 26 percent? Clairvest has achieved an average internal rate of return of 26 percent on the nine investments it has exited. That's even more impressive when you consider the company is less than 15 years old and employs about a dozen people.

It's a case of quality, not quantity. Six of the 12 are senior managers with significant experience in the investment industry and are active in the identification, structuring and management of the company's investments.

And the benefits aren't just monetary in terms of what Clairvest brings to ISOs, Wagman says: "We've been quite successful in helping our partners build their companies, and we've been quite successful in helping them raise capital and do acquisitions. That's where we can lend the most expertise."

Jeff Parr, Clairvest's co-CEO and managing director, says, "Obviously, we can write a check, but so can everyone else. We provide knowledge, expertise and a sounding board."

Clairvest also provides to its investment partners advisory services, which may include evaluation of business prospects, strategic planning, marketing and financial advice and tax strategy. The members of Clairvest's board of directors function as resources, and sometimes mentors, to their investment partners.

Parr explains, "Our board of directors is made up of people who have built companies and very successfully. They've been through the bumps and bruises of building a company. A lot of our CEOs find that to be a great sounding board as well."

ISOs, ask yourselves, "Do I have what it takes?" If the answer is yes and you're poised, pen in hand, to sign up - consider Clairvest's criteria. When considering investment opportunities, Clairvest targets three types of investments:

Roll Ups - Business consolidations in industries with recurring revenue, distributed customers, a high degree of fragmentation and the presence of cost-based economies of scale.

Roll Outs - Expansions of proven business concepts or operating technologies.

Value Plays - Acquisitions of businesses, available at compelling valuations.

Another item to keep is mind is Clairvest's investment strategy. When they make direct investments in emerging businesses, they are guided by the following factors:

Direct investments in any one business are generally limited to a maximum of $30 million at the initial stage. Minimum investment size is generally deemed to be $5 million.

Investments are expected to have a time horizon to realization of three to seven years.

Management of the prospective business must have capital in the business and must derive the major portion of its financial rewards from its own equity participation.

Management of the prospective business must demonstrate an entrepreneurial attitude with respect to the exploitation of opportunities available to its business.

Investments must have the prospect for significant long-term capital appreciation.

The business must be strategically positioned in its specific markets and offer high potential for domestic or global growth.

OK, you meet the criteria. Now what? If you think your company and management style fits into Clairvest's model, here's a glimpse of how things work:

The deal typically originates with Clairvest conducting detailed industry research. Then it seeks out companies and management teams that match its established criteria. When it finds such companies, it then spends three to six months developing and testing their investment theses while becoming acquainted with the companies and their principals. Clairvest focuses on a small number of carefully selected companies and monitors its investments by regularly reviewing detailed operational and financial reports.

Clairvest's investment philosophy is to become the lead outside investor in emerging and established businesses with capable, motivated and experienced management. It supports existing management by providing direction at the board level while allowing management to maintain its autonomy with respect to day-to-day operations of the business.

The extent to which Clairvest is involved in its partnerships varies, but it generally depends upon the size of the equity investment, the stage of development of the business and the particular needs and desires of management.