<link rel="alternate" hreflang="en-us" href="https://www.prudentialprivatecapital.com/posts/how-to-complete-a-private-placement"> <link rel="alternate" hreflang="en-gb" href="https://www.pricoaprivatecapital.com/posts/how-to-complete-a-private-placement"> <link rel="canonical" href="https://www.pricoaprivatecapital.com/posts/how-to-complete-a-private-placement" />
Our website requires features that may not be fully supported by your current browser. Please try an other one.
 in 
Economics

How to Complete a Private Placement

All companies need capital.

Issuing a private placement is a practical means by which a company can raise capital, however, the process involved is not as well-known as other public market alternatives. The infographic below details the steps involved in issuing a private placement, revealing how similar the process is to obtaining bank financing.

A private placement is essentially the private sale (or “placement”) of corporate debt or equity securities (or “issue”) by a company (or “issuer”) to a limited number of investors (aka lenders). The buyers are typically institutional investors, such as insurance companies.

The timeline for completing a private placement will vary based on the size and credit profile of each issuer as well as the specific private placement lender, however, it generally takes 6-8 weeks to complete the first transaction.

Deal Launch

The first step, Deal Launch, initiates the window of time from which the issue is offered to investors, to when a decision must be made, typically 1-3 weeks.

Negotiations

Next, the Negotiations step kicks off discussions between the issuer and the investor on the specifics involved with the investment, such as pricing or legal terms. Negotiations will continue to take place leading up to closing.

Information Gathering

During the Information Gathering step, the investor will complete their due diligence on the company, which often involves the following:

  • Reviewing and verifying the company’s financial statements
  • Meeting with the management team
  • Assessing the company’s long-term outlook and market position
  • Industry analysis

Investment Risk Analysis

At the Investment Risk Analysis stage, the investor will determine a credit rating for the company issuing the private placement, which reflects how capable the issuer is of making interest and principal payments. This process is similar to how rating agencies determine ratings for public bond issuers.

The lender will ask questions such as:

  • How stable are the company’s revenues and earnings?
  • How stable are input costs and operating expenses?
  • How stable is the management team and how deep is the bench?
  • Who are the company’s main competitors and what are the competitive dynamics of the industry?
  • Who are the main customers, and is there any significant customer concentration?
  • Is the company profitable? Why or why not?
  • What is the long-term target debt to equity ratio?
  • What is the long-term target debt to earnings ratio?
  • What other debt obligations are outstanding?
  • What is their track record for paying creditors?
  • What is the company’s long-term growth strategy?

After answering these questions and performing a full analysis of the company’s financials, an investor can determine how much risk they feel is associated with providing capital to the company. Generally, the higher the risk, the lower the quality rating.

Pricing

Next, during the Pricing step, the investor determines what interest rate is needed to compensate for the associated risk. Private placements are priced similarly to public securities, where pricing is typically determined by adding a credit risk premium (or spread) to the corresponding U.S. Treasury rate.

Rate Lock

Once the company and the investor agree to a spread, they move to the Rate Lock step. This is when the private placement investor and the company agree to lock-in the interest rate (or coupon) based on the agreed upon spread and the prevailing U.S. Treasury rate at a specific day and time. For non-USD financing, the multi-currency swap would also be executed at this stage.

Closing

The final step, Closing, is the formal exchange during which the actual transfer takes place between the company and the lender; the issuer transfers the security that was offered to the investor in exchange for the capital the investor agreed to pay for it. The steps to closing very much resemble the process for establishing a line of credit with banks.

Although the process for issuing a private placement is less familiar than securing bank debt, ultimately, the two processes are quite similar. Furthermore, the relationship between the company and its lender, which developed during the issuance process will not end at closing, but extend throughout the life of the private placement (3-25+ years) and beyond.

Interested? We would be happy to discuss how a private placement could work for you.

Contact us

This document does not take into account individual circumstances, objectives or needs, nor is it intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services.  This document does not constitute investment advice and should not be used solely as the basis for any investment decision.
This article represents the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorised, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of Pricoa Private Capital is prohibited. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Pricoa Private Capital has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. Past performance is no guarantee or reliable indicator of future results. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. Pricoa Private Capital and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of Pricoa Private Capital or its affiliates.
The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients or prospects. No determination has been made regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. For any securities or financial instruments mentioned herein, the recipient(s) of this report must make its own independent decisions.

Pricoa Private Capital (‘PPC’) is a trading name of PGIM, Inc. (‘PGIM’), the principal asset management business of Prudential Financial, Inc. ('PFI'), and it is also a trading name of PGIM Private Capital Limited and PGIM Private Capital (Ireland) Limited. In the United Kingdom, information is issued by PGIM Private Capital Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Private Capital Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 172071) and registered in England No. 1331817. In the European Economic Area (“EEA”), information is issued by PGIM Private Capital (Ireland) Limited with registered office: Pramerica Drive, Letterkenny Business and Technology Park, Letterkenny, Co Donegal, F92 W8CY, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Private Capital Limited in reliance of provisions, exemptions or licenses available to PGIM Private Capital Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Private Capital Limited and/or PGIM Private Capital (Ireland) Limited to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).