Boutique bank Lesmoir-Gordon, Boyle & Co is riding high But as bank credit dried up and interest rates dropped, the three, who met as graduate trainees at Schroders, realised that the small companies they were backing were not simply in need of equity. We became aware that companies had a natural and proper requirement for funding they couldn't get from the banking market. "With our base of high net worth individuals - who were already making equity investments with these companies - approaching them to lend money seemed obvious," explains Lesmoir-Gordon. The firm's successful debt programme arose from conversations with clients. The debt offering is an attractive one to both investors and recipients: loans are secured against tangible assets or receivables; they are short term, with a three-year maturity and monthly returns; and importantly the investors providing the funding were already familiar with the company's balance sheets and strategy through their existing equity investment. "Causes and features of the financial crisis included extensive structuring of products and banks behaving in a less than ethical way," says Lesmoir-Gordon. We pride ourselves on a high standard of ethics and hire staff who understand the structuring of products in an appropriate and sensible way, and in the interests of our clients. For Lesmoir-Gordon, his mantra is not one of mere lip-service. He explains that there's a commercial upside to the bank's code of conduct: "We get business because we're perceived to be straight." He also believes that LGB's success is in no small part down to the fact that it does what banks used to do - "simple" and "vanilla" investments, be they equity or debt. "Banks are not lending and depositors are getting poor returns on short-term money," he goes on. The equity side of the business is sector non-specific, but the companies in its investment portfolio hail mainly from the medical technology, software services and high-end retail sectors. Some £26m has been invested to date. LGB keeps a near-constant eye on its portfolio investments, using a disciplined framework that includes "red flags" that are raised when executives exhibit character weaknesses, if communications with investors become irregular, and or if company costs are not properly controlled. The bank arranged funding for 34 businesses during the financial crisis, with only one falling into unrecoverable administration. Its investment criteria, plus selecting companies with an in-demand specialism, has helped to insulate LGB and its investors from the recession. "Five companies have been problem children," said Lesmoir-Gordon, "but in these cases the bank has lent a bit more money and reworked business plans - all with positive outcomes." One such company is Hallmarq - a UK manufacturer of veterinary MRI scanners, renowned in its field for developing the world's only standing horse scanner and for its work with pandas. LGB arranged the investment of £3m into this Guildford-based company by no fewer than 33 high net worth individuals. The business, started in 2001, invented the scanners to avoid the risk of using general aesthetics on animals, and has revolutionised the diagnosis and treatment of equine lameness. Other businesses LGB's network of investors have funded include Event Pad. This company provides interactive live technology services at auctions and conferences using iPads, but due to the nature of its security felt it could not access mainstream lenders. The company is UK-based, with imminent plans for expansion into Germany and the US. To emulate the old merchant banking model, Lesmoir-Gordon and his partners have not spent money on buying teams from rival banks, but are hiring younger people with a number of years" experience to ensure "they grow up and absorb our culture." "It resembles Schroders in the 1970s, small with short lines of reporting, and a friendly atmosphere missing in many mainstream banks," he says. Still with just 10 members of staff, LGB prides itself on its short reporting lines, which aid decision-making. "The underlying principle in a merchant bank was to act, decide and analyse quickly - a function of smaller numbers," says Lesmoir-Gordon. He likens the main high street banks to enormous cruise ships - they take an inordinately long time to change direction - and therefore he does not see a significant shift in their attitude towards small companies any time soon. But in addition, banks are in a jam. While government, media and public are pressuring them to open their loan books to British businesses, regulations still require them to have a higher ratio of capital loans. It's impossible to do both at the same time. And that's a niche that LGB continues to hope to take advantage of.