A private placement is a sale of stocks, bonds, or other securities directly to a private investor, rather than as part of a public offering in the open market. Typically, the investors involved in a private placement are institutional investors such as mutual funds, banks, insurance companies, pension funds, and high-net-worth individuals.
Private placements can be an effective way for companies to raise capital, especially for smaller companies that may not have access to public markets. This process is generally quicker and less expensive than a public offering, as it does not involve as many regulatory requirements.
Securities offered through private placements are not registered with the Securities and Exchange Commission (SEC) if they meet certain criteria, and as such, they cannot be resold in the open market without registration or an applicable exemption. For this reason, they are often referred to as “restricted securities.”
Here’s an example of a private placement:
Suppose a small technology company, TechCo, needs to raise $10 million to fund its expansion plans. Rather than going public with an Initial Public Offering (IPO), which can be a complex and time-consuming process, TechCo instead decides to seek a private placement.
TechCo approaches a private equity firm and offers to sell a 20% stake in the company for $10 million. After assessing TechCo’s business plans and financials, the private equity firm agrees to the deal. In this way, TechCo has managed to raise the capital it needs more quickly and with fewer regulatory hurdles than it would have faced with an IPO.
Example of a Private Placement
Here’s a real-world example of a private placement:
In 2015, Uber raised $1.6 billion in convertible debt from Goldman Sachs’ private wealth clients. This was an example of a private placement as the sale of the convertible debt was not offered to the general public, but instead to a select group of investors.
Convertible debt is a type of bond that the holder can convert into a specified number of shares in the issuing company. Uber chose this type of instrument as it provided immediate capital for expansion, and it potentially allowed investors to convert their debt into equity if the company goes public.
So, Uber, in need of substantial capital to continue its aggressive global expansion, chose a private placement to quickly raise this capital from institutional investors. This method of raising funds was faster and less cumbersome than conducting a public offering. For the investors, they were provided an opportunity to invest in a rapidly growing company.