In today’s financial world, companies in their attempt to finance their operations and fulfill their growth and expansionary objectives, have a number of options in their capital structure. One main category is that of equity capital which of course has a primary role in a company’s funding as it represents that type of capital which is initially injected into a company.
The equity capital markets can be either public or private. Most people are aware of the stock market which is a public equity market with all the benefits and transparency that it brings to publicly listed companies and their investors. However, as the needs of different companies vary, the same happens with their equity capital raising methods. Therefore, depending on a company’s size, enterprise value, the maturity phase, the years of operation and several other factors, a company can be financed with equity capital without necessarily being obliged to take the public route of an IPO and stock exchange listing.
One way of accessing private equity capital is for a company to seek investment through Private Equity funds which can commit large sums of money by following a long-horizon holding style. They can also have a variety in their structures, strategies, investment philosophies and the requirements they have from their portfolio companies.
Private equity investments mainly seek to obtain a significant ownership (usually majority) and even buy out a company in order to be able to create a sustainable value for the firm, improve the company’s existing business model, or make a turn around on the business. Investments can be for different enterprise sizes and stages of a business cycle. Ranging from Small Cap angel investing, Middle Market venture capital, to large Cap corporate buyouts. This can include privatizations of publicly listed companies that want to go private again.
One important and distinctive feature of a Private Equity type investment into a company, is its robust involvement in the company’s decision-making process, its increased access to internal information and close communication with the company’s management. This close collaboration enhances the value of the portfolio companies which are assisted in their growth and expansion in new markets and geographies.
Private Placements are ‘non-public’ offering investments where the ownership shares are sold to a controlled group of private and accredited investors. Among the institutional investors in a typical private placement, we can find large banks, insurance companies, pension funds, and mutual funds. In a number of cases, a private placement can also be done from a single investment company and not with a controlled group of investors. Most private placements as they are ‘non-public’ offerings, do not have to be registered with the Securities and Exchange Commission. Additionally, businesses do not typically need to disclose detailed financial information, and the need for a prospectus is often waived.
The private placement provides a higher degree of flexibility and provides to owners more significant control over their company as opposed to the private equity and venture capital investments which usually take majority control over the board and management of companies.
Companies have the opportunity to provide a return on their investments at a reasonable pace and time frame. The process is also usually faster and more streamlined than attracting private equity or venture capital.
Finally, Private Placements are not only for public companies. Privately-held younger or smaller businesses can also benefit from private placements without having to go through the stock exchange listing process. Additionally, a subsequent stock exchange listing is optional and companies may or may not utilize this feature down the road.
Private capital markets play a remarkable role which has often been overlooked. Over the years, many stock market success stories have based their success in private capital markets, either through equity private placements or private equity funds which have acted as their significant business accelerators.