A decision to increase the equity capital by inviting new shareholders is of immense importance to the current proprietors of a business. If this decision is made, the next step is to choose the optimal TYPE of the new equity funding. If you, as a private owner of the business, answer “Yes” to the following questions, then you might be interested in a private placement (sale) of a minority equity stake in your company to a limited number of institutional investors:
- At present, is your business sufficiently cash-generative to support the operating activities and on-going business development?
- Are you reluctant to disclose publicly detailed information about the company, its business and structure, the owners and management?
- Do you feel that the financial reporting requirements for a listed company are excessive?
- Do you wish to avoid investment in the IPO process and the on-going expenses to support the public status of the company post-IPO?
- Do you know the true value of your company and do not need a verification of this value by the stock market?
It is worthwhile remembering that even in the case of private placement, where the disclosure requirements are lighter than for an IPO, your company will have to submit certain information about its activities, financial performance, business structure and the development plans. The company will have to conduct an audit and, likely, to change the legal structure to meet the investor requirements for greater transparency of the business.
As a business owner, you have to be aware that private placement is often conducted with a discount to a true, “intrinsic” value of the company – that is, the value that could be obtained via an IPO. Such a discount may occur for a number of reasons:
- Limited liquidity of the equity stake obtained by the new investors via private placement.
- Heightened risks due to the limited transparency of the company.
- Limited competition among investors for the company's equity stake offered.