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.
FAQs
Furthermore, private placement deals can be custom-built to meet the financial needs of both the issuer and investors. One major disadvantage of private placement is that bond issuers will frequently have to pay higher interest rates to entice investors.
What are the advantages of raising capital through private placement? ›
Advantages of using private placements
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.
What are the advantages and disadvantages of raising money from private investors? ›
While private investments offer the potential for investors to meet their investment goals, provide early access to innovative ventures, and offer an opportunity to actively shape the company's growth, they also come with higher risks, limited liquidity, and valuation challenges.
What are the advantages and disadvantages of investing in private companies? ›
Investing in Private Markets: Evaluating the Pros and Cons
The potential for higher returns, access to unique investment opportunities, and flexibility and customization are appealing aspects. However, it is crucial to acknowledge the drawbacks of illiquidity, higher risk, volatility, and limited transparency.
What are the disadvantages of private funding? ›
Disadvantages of private funding
Consider these disadvantages when applying for private funding: Awards are often smaller and less likely to cover all project costs, and many don't cover indirect costs.
What is the disadvantage of raising finance through a share issue? ›
Diminished control and ownership
Each share that is issued and sold represents part of a business for which control and ownership are relinquished by the founders. This means that limited companies lose some of their right to steer the direction of the business and make important decisions about its future.
What is private placement in finance? ›
What Is a Private Placement? A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on a public exchange. It is an alternative to an initial public offering (IPO) for a young company seeking to raise money to expand.
Which of the following is a drawback of private placements? ›
Lack of Liquidity: Private placements are not traded on public exchanges, which means that investors may have difficulty selling their securities if they need to liquidate their investments. This can be a disadvantage for investors who require liquidity.
What is the main disadvantage of private equity financing? ›
High risk: Private equity investments can be riskier than public market investments. The lack of transparency and regulation in private companies can lead to unforeseen issues. Additionally, the success of these investments often depends on the ability to execute strategic changes, which may not always be successful.
What are the advantages and disadvantages of a private company? ›
Disadvantages
| Advantages | Disadvantages |
|---|
| Owner can retain control | Must be registered with the Registrar of Companies |
| More able to raise money | High set-up costs (legal and administrative) |
| Limited liability | Harder to motivate and control workers |
Both public and private investments have their distinct advantages and disadvantages. Public investments offer liquidity, transparency, and easy diversification, while private investments can provide access to high-growth opportunities and potentially higher returns.
What are the disadvantages of a company going private? ›
8 Disadvantages of a Private Limited Company
- Administrative Burden.
- Financial Transparency and Public Disclosure.
- Costs and Financial Obligations.
- Restrictions on Company Activities.
- Limited Stock Exchange Access.
- Legal and Regulatory Requirements.
- Personal Guarantees and Liability.
- Perception and Credibility.
The main benefits of a placement year, from learning key on-the-job skills, to having the chance to save money. The potential downsides of a placement year, like temporarily leaving university life behind, and taking on the pressures of the working world.
What are the disadvantages of private placement life insurance? ›
Private placement life insurance typically comes with high costs and fees. These costs can include administrative fees, mortality and expense charges, premium loading, and investment management fees.
What are the pros and cons of a private college? ›
Public vs Private College Main Differences
| Public College | Private College |
|---|
| Fewer scholarship and grant dollars | More scholarship and grant dollars |
| More research opportunities | Typically fewer research opportunities |
| Larger class sizes | Smaller class sizes |
| More degree options | Typically fewer degree options |
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