What is a Private Placement?
A private placement is a sale of securities to a select group of investors, such as wealthy individual investors, banks, pension funds, and insurance companies. It cannot be sold on public exchanges, such as the NYSE or Nasdaq.
Advantages and Disadvantages
An advantage of private placements compared to IPOs is that there are fewer regulatory requirements. It does not have to be registered with the U.S. Securities and Exchange Commission, as specified in Regulation D of the Securities Act of 1933, and companies do not have to disclose as much information to the investors. A private placement is especially attractive to startups because it is a way for them to raise financing without being under the public eye.
However, a disadvantage of private placements is that the investor may be more demanding because they may expect a higher rate of interest, higher dividend payment or a higher percentage of ownership in the company. Furthermore, because there is no credit rating for the bond, the buyer has no indication of how risky the bond is, and as a result, they may require that the bond be secured by collateral.
Industry Overview
There are two types of deals for private placement: primary and secondary. Primary deals involve purchasing new shares in companies through new issuances, while secondary deals involve purchasing existing shares in companies from existing investors. Primary deals are typically more popular, but secondary deals have been increasing.
Within private placement groups, the two main roles are Sales and Transaction Management. In Sales, agents reach out to Limited Partners (LPs), pitching their client funds to them. In addition, they meet with private equity fund clients to determine the best matches. In Transaction Management, agents manage all the information received from Sales and working on the document-based questions (DBQs) and requests for proposals (RFPs) for the potential LPs. The primary team is similar to traditional public market groups, while the secondary team is more similar to an M&A or industry group.
Exit Opportunities
Some typical exit paths for people on the primary side are other placement agent groups, investor relations jobs at funds, or other groups in investment banking. On the secondary side, there are similar exit paths, but it is easier to join a product or industry group in investment banking or go into private equity compared to the primary side.
