When it comes to raising capital, companies have a variety of options available to them. One of the most popular is a private placement, which is a sale of shares or bonds to pre-selected investors and institutions, rather than doing so publicly on the open market. This is an alternative to an initial public offering (IPO) for a company looking to expand. Private placements are regulated by the U.
S. Securities and Exchange Commission under Regulation D.Private placements offer several advantages over bank loans. For starters, private placements have longer maturities than bank loan commitments, usually more than 3 to 12 years compared to 3 to 5 years. Private credit has also historically maintained lower loss ratios than high-yield fixed-income instruments.
Furthermore, private lenders can provide deeper access to business records for stronger due diligence and documentation than in public markets. In addition, private credit usually consists of a single entity lending loans to a borrower. This can allow for faster and more efficient restructuring and, potentially, greater recovery in the event of default, compared to publicly syndicated debt placements involving several lenders with opposing priorities. Preferred secured loans offer a relatively stable return and have a lower risk and return spectrum than other private credit strategies. An investor in privately placed shares may also demand a higher percentage of ownership in the company or a fixed dividend payment per share. Or, the company can use private credit and work with a single lender to create a customized capital solution.
The variety of private credit strategies and their characteristics make it possible to structure a private credit portfolio to achieve a wide range of objectives and adapt to the individualized goals of the investor. Instead of a prospectus, private placements are sold through a private placement memorandum (PPM) and cannot be widely promoted to the general public. Private placements have become a common way for startups to obtain funding, particularly those working in the Internet and financial technology sectors. In addition, private placements allow business owners to raise capital without the IPO process, which is often lengthy, difficult and onerous. There are minimum regulatory requirements and standards for private placement, although, like an IPO, it involves the sale of securities. While private lenders historically focused on intermediate-market companies, the recent growth in fund size has also made it possible to finance larger operations, while maintaining prudent fund diversification parameters. Above all, a young company can remain a private entity, avoiding the numerous regulations and annual disclosure requirements that follow an initial public offering. Overall, private placements offer several advantages over bank loans when it comes to raising capital.
Companies can benefit from longer maturities, lower loss ratios, deeper access to business records for stronger due diligence and documentation, faster restructuring in case of default, and more customized capital solutions.
