Often times, unique opportunities present themselves outside of the capital markets.
Private placement financing can be a unique method for a business to obtain capital or it may be used to buy income producing commercial real estate. In most cases, private placements are investments that the vast majority of investors do not have access to and it is something we have ability to deliver to our clients. As with other sources of investing, private placements have to be structured properly to ensure quality and consistency of returns.
Private placements are a very small portion of our business. However, we believe that to be an effective wealth management firm means we have to keep our options open to new ideas and unique opportunities to enhance our client’s returns.
What is Private Placement
Private placement, also known as a non-public offering, is where a business sells corporate bonds without involving the public, brokers, or underwriters. Instead, bonds and shares are sold through specialist financial institutions. Private placements are offered to a limited number of investors.
For a securities issue to be considered a private placement, it must meet these three features:
The offer shouldn’t be public
The investors must be limited in number and accredited
The securities don't need to be registered with the securities exchange regulatory commission.
Here are a few reasons why you should consider private placement financing.
Long Maturity Period: Private placements offer longer maturities than other standard bank financing arrangements. If your business is looking to extend its refinancing obligation beyond the 5-year maximum period provided by banks, private placement is ideal. Besides, longer maturities allow limited amortization, enticing businesses looking to invest in capital assets or other investment projects with longer investment returns.
Ease of Execution: Private placement financing is completed by different companies, including private-held, middle-market, and large public companies. Transaction in private placement financings gives the issuer access to capital on a better scale than underwritten public debt offerings without some preconditioned requirements like minimum size restrictions or ratings.
Attracts Suitable Investors: In a private placement, the company offers an investment opportunity to a limited group of investors. Therefore, you can target the most suitable investors for your company who know the business environment and can offer the required business assistance. The right investors can offer the needed support to your business management, helping you grow.
Fixed-Rate: Most private placements have a fixed interest rate that helps minimize interest rate risk. Therefore, by choosing private placement, your business can avoid the concern over floating-rate coupons. Additionally, a fixed coupon makes it easy for your company to allocate the cost of debt capital during project financing.
Diversification of Capital Sources: You can diversify your company's capital sources and structure. The private placement market is independent of numerous market variables that influence the bank market. Additionally, private placement offers can be customized to meet your business needs, unlike bank credit terms. Diversifying financing sources is essential, especially during market cycles where bank liquidity is tight.
Privacy and Control: If you opt for public debt and equity offerings, you will be asked to disclose company information and fill out other public documents. However, private placements allow companies to remain private as they are negotiated confidentially. Public discourse is limited, and the company will not be obliged to public shareholders.
Shortcomings of Using Private Placement Financing
Here are a few reasons why you should consider private placement financing. Although private placement offers a series of advantages, it has its downsides too, such as:
Reduced Market: Since the offering isn’t made public, the limited pool of investors allowed to subscribe offers a reduced market. The reduced market for the shares of your company could have a long-term effect on the company's value.
Substantial Discount: You might be compelled to sell your shares and bonds at a discount to compensate the limited investors for the long-term returns and high investment risk.
Frequently Asked Questions
Is A Private Placement Offering Good Or Bad?
Private placement is good for the company since it offers privacy and control over who buys the shares.
Is Private Placement Debt or Equity?
Private placement is debt security similar to bank loans or bonds. Thus, they can either be secured (if backed by collateral) or unsecured (if the collateral is not required).
What Is the Difference Between IPO and Private Placement?
Although both are fundraising methods used by companies, the stocks are sold to pre-selected institutions or investors instead of being put on the open market in a private placement. On the other hand, an initial public offering is where the shares of a private company are placed on the market for the public to subscribe to.
Are Private Placements More Expensive Than Public Offerings?
No. Private placement is less expensive than public offering since it may have significant discounts. Besides, it is not subject to many regulations by the Securities Exchange Commission.