What is a Private Placement?

Описание: Private Placements are sale of securities to investors who have been pre-selected in advance. They provide a good option to companies looking to raise financing, but don't want to raise funds via an Initial Public Offering (IPO).

There could be several participants in the private placement market, namely, pension funds, insurance companies, banks, mutual funds, and wealthy investors to name a few.

Private Placements are light touch in terms of regulation and do not need stringent credit ratings from bond agencies. However, in light of this, the investors in the private placement market are much more demanding, and require higher interest rates, regular dividends, greater ownership, to be compensated for the extra risk being undertaken.

Private placements do offer a quicker process for companies looking to raise funds. It also makes companies perform at a much higher level since they need to adhere to guidelines set down by the investors. Private placements are another way for companies to reduce their exposure to banks, diversify their capital structure and put longer term capital onto their balance sheet.

The private placement market is a more stable market. Historically, during recessions e.g. 2008 Great Recession, when the bank market was closed for lending, the private placement market remained open.