Private Placement vs. Private Equity

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To fund its operating activities, a company can raise cash on financial markets, such as the New York Stock Exchange or Hong Kong Stock Exchange. The firm also can work with investment bankers to privately place, or sell, its equity or debt securities. Investment bankers help all organizations, including academic institutions, raise money by selling financial products to private-equity firms.

Private Placement

  • A private placement is a transaction in which a company raises money directly from private investors. For most businesses, including the financially stable ones, being able to raise operating cash merely constitutes table stakes -- that is, the minimum required to keep them in the competitive game. A company turns its attention to private placements if it is unable -- or unwilling -- to raise cash via conventional public markets, such as the London Stock Exchange. This may result from a bad economy, prohibitive rates on credit markets, high corporate indebtedness or mediocre operating performance. In a typical private placement, the issuing firm reaches out to investment bankers who in turn place, or distribute, the company's debt and stock products to a small number of investors.

Private Equity

  • Private equity is cash that investors pour into a company not listed on a financial exchange. The term also refers to money invested in a business to un-list, or de-list, it from a financial market -- that is, to buy current shareholders out and convert the company into a privately held company. Private equity often has a strategic impact in an industry's competitive landscape, because the un-listing of a major player could recast the field of organizations in the race to be market leader. This might happen if other publicly traded businesses have access to more liquidity on credit markets and can parlay their resources to grow faster than the privately managed institution.

Relationship

  • "Private equity" and "private placement" are distinct terms, but they interrelate in investment activities. By placing its products through private channels, a company is -- in essence -- reaching out to private investors who ultimately become private-equity holders once they inject cash into the business. Similar to shareholders of a publicly held company, private-equity holders may receive periodic dividends. They also might reap substantial profits if the privately help company ultimately decides to issue common shares on a public exchange.

Personnel Involvement

  • Various professionals help companies raise operating funds through private outlets. Besides investment bankers, financial analysts and accounting managers review corporate performance data and recommend the best time to seek private equity. Institutions such as private-equity firms and hedge funds also weigh in on private fundraising, providing cash if money-seeking businesses meet their investment targets.

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