What is a private placements ?
As the name suggests, a ‘private placement’ is a private alternative for companies to raise capital, as opposed to traditional bank financing. In a private placement transaction, both the business (or issuer) and a number of investors buy the debt or securities instruments.
For instance, companies in private placement market for a desire to access long-term, fixed-rate capital, diversify financing sources. On top of that, this provide additional financing capacity beyond existing banks facilities. And, in the case of privately held businesses to maintain confidentiality.
Investors in private placements include large financial entities including, banks, mutual funds, insurance companies and pension funds, as well venture capitalists, investors and other entities.
Qualification and regulation of investors
The investors who invest in private placement are limited in number and must be “accredited”.
The general guide of accredited investors are as follow:
1) Directors, executive officers, and general partners of the issuer
(2) Investors whose net worth either individually or jointly with their spouse equals or exceeds $1 million
(3) Natural person purchasers who have “income” in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000, jointly with their spouse).
(4) A business entity will be treated as a single accredited investor with asset of $5million.
Types of Private placement instruments
The private placement instruments come with with endless array of structuring alternatives. One of the key advantages of a private placement is its flexibility.
1. private placement redeemable convertible preference shares(RCPS)
2. private placement trade program (PPP)
Redeemable convertible preference shares (RCPS)
Private placement debt securities are similar to bonds and can either be secured, meaning they are backed by collateral, or unsecured, where collateral is not required.
Companies issue preference shares to raise capital. Preference shares carry many of the benefits of both debt and equity capital.
Similiarly, a benefit for investors who hold preference shares is that they receive dividend payments before common stock shareholders. A drawback is that they have no voting rights as common shareholders typically do.
Most investors are attracted to preferred stock because it offers consistent dividend payments without the lengthy maturity dates of bonds or the market fluctuation of common stocks.
- The chief benefit of preferred shares for investors who hold them is that they get paid dividends before common shareholders.
- Among the drawback for investors is a lack of shareholder voting rights, and
- Issuing companies face a higher cost for this type of fund raising when compared to debt.
Private Placement Trade Program (PPP)
Investing in good private placement programs can give yield higher than that from traditional methods of investments.
With the ever-changing global dynamics of investments, private placement programs have emerged as a popular sector in the investment market. These are the types of investments that traders, brokers, and investors look out for in order to earn better returns on their invested money.
The accredited investors have to submit a full compliance package, which includes POF (Proof of Funds), CIS (Client Information Sheet), passport copy, etc.
The key players involved in PPP are trader groups, banks who issue bank instruments, brokers, exit buyers. These exit buyers are financially-strong companies such as insurance companies, trusts, pension funds, etc.
Medium Term Notes (MTNs), Bank Guarantees (BG), Stand-by Letters of Credit (SBLC) are bank instruments. Traders in Private placement programs make profits in buying or selling such bank instruments.
Advantages of Private Placements
- Private placements like RCPS are typically “buy-and-hold”, so the company would benefit from having a long-term relationship with the same investor throughout the life of the financing.
- If you invest in a private placement trade program you will able to reap benefits of higher yields.
- A genuine private placement program will protect investor information and interests while multiply the profits.
- As genuine traders have a predetermined contract with the buyers to purchase the bank instrument at a higher price, it minimizes the risk.
- There are few people have gained immense wealth through private placement programs.
- Investor can undertake the funding of billion dollar projects with liquid cash which will result in larger profits.
Private accredited investor has a constant appetite for private placement instruments throughout market cycles and the calendar year.
Because private placement in nature, it is vital for the investor to have the capacity to grow as a financial partner. Also, to have the knowledge and experience to understand the private placement instruments.
In conclusion, when done right, private placements will give investors very handsome profit return from their investments.