What is Private Placement? – Saurabh Investments

by | Jun 28, 2021 | Investing, Investment Banking | 0 comments

Private Placement

Meaning

Private Placement is the offering of bonds or shares to the selected group of people instead of placing them in the market for public. This selected people can be either individual investors or institution or both as well.

This is the most popular way of generating funds for companies who are at the initial stage of development for example, startups.

Private placement is done by both public and private companies who wants to generate funds but are not eligible enough to list their company in the stock market.

Purpose of Private Placement

The main purpose of private placement done by the firms is to generate money from wealthier investors, institution banks without having to go through the legal formalities and documentation process involved in raising funds from the public.

Difference between Private Placement and Pubic Offering

In private placement, the securities are sold to the group of investors. Whereas, in public offering, the securities are available for all the public investors.

Private placement can be done by both firms whether private and public. Whereas in case of public offering, the firm is either listed on the stock exchange (known as Follow-up-public-offering) or about to get itself on the list for the first time (known as Initial-public-offering).

Private placement deals doesn’t need to be registered with a regulator, whereas publicly offered securities have to be registered with a regulator.

Who can be the investors for private placement?

In private placement, the securities are issued to a limited number of investors known as “accredited”. An accredited investors is the one who –

  • Meets a certain requirement of qualification and financial net worth.
  • Is experienced in making investments and taking financial decisions.
  • Could afford to take risk and losses from such investments.

Does private offerings affect the share price of a company?

If the private placement of shares is done by a private company, then it will not affect the share price because the shares are not listed in the market yet.

However, if the placement is done by a public company, it will decline the share price in the near term. This is because holdings of the existing shareholder remains the same and new shares are issued to the investors.

Types of Private Placement

The most common types of private placement are long term senior debt and fixed rate senior debt.

Private placements debt securities are similar to loans or bonds and can either be secured, meaning they are backed by collateral, or unsecured, in which collateral is not required. In addition to senior debts, other types of debt issue are –

  • Term loans
  • Revolving loans
  • Asset backed loans
  • Subordinated debts
  • Leases
  • Shelf issues

Advantages of Private offering

  • It is good for small firms who are planning to grow their business but aren’t eligible to be listed in the stock market.
  • Offering of shares in private required very less documentation to be signed.
  • The process of raising funds through private placement is much faster than raising funds through public offering.
  • If it is a debt security, the company issues bonds through private offering which generally have a longer duration to mature than a bank liability. Thus, the company will have more time to repay the money to the investors.

Disadvantages of Private offering

  • The main disadvantage of private offering of securities is to find the most suitable investor(s) who can be a great source for generating funds for the business.
  • Some investors may ask for a greater interest rate on bonds OR a higher dividend for the shares, than what is currently prevailing in the market. This is because of the risk they are taking to invest privately.
  • If investment in a private company is by an issue of equity shares, investors may ask for a higher ownership and in turn, will indulge in the decision-making process. Due to this, it will become difficult for management to take independent decisions.

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Reference

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    THE LITTLE BOOK OF VALUATION

  • Writer Name :

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    Portfolios of the Poor: How the World's Poor Live on $2 a Day

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    Daryl Collins , Jonathan Morduch , Stuart Rutherford and Orlanda Ruthven

Audio Book Reference

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    Saurabh Kamale

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