A private placement - or non-public offering - is where a business sells corporate bonds or shares to investors without offering them for sale on the open market. These investors could be insurance companies or high-net-worth individuals.
By selling corporate bonds you can raise funds for expanding your business, to finance mergers, or to supplement or replace bank funding. Raising funds in this way offers benefits such as providing stability through long-term investment and protecting the value of your business' shares - see advantages and disadvantages of raising finance by issuing corporate bonds.
By using private placements, you can raise a significant amount of finance, and often quite quickly. A private placement doesn't need to involve brokers or underwriters and instead they can usually be arranged through banks or specialist financial institutions.
Advantages of using private placements
There are several advantages to using private placements to raise finance for your business. They:
- allow you to choose your own investors - this increases the chances of having investors with similar objectives to you and means they may be able to provide business advice and assistance, as well as funding
- allow you to remain a private company, rather than having to go public to raise finance
- provide flexibility in the amount and type of funding - eg allowing a combination of bonds and equity capital, with amounts ranging from less than £100,000 to several million pounds
- allow you to make a return on the investment over a longer time period - as private placement investors will be prepared to be more patient than other investors, such as venture capitalists
- require less investment of both money and time than public share flotations
- provide a faster turnaround on raising finance than the venture capital markets or public placements
As a result, private placements are sometimes the only source of raising substantial capital for more risky ventures or new businesses.
Disadvantages of using private placements
There are also some disadvantages of using private placements to raise business finance. For example, there will be:
- a reduced market for the bonds or shares in your business, which may have a long-term effect on the value of the business as a whole
- a limited number of potential investors, who may not want to invest substantial amounts individually
- the need to place the bonds or shares at a substantial discount to compensate investors for their greater risk and longer-term returns
Additionally, although it isn't a mandatory requirement, having a credit rating can be an advantage. However, this is time consuming and will be an added cost to the process.