PRIVATE PLACEMENT

Concept & Background

Broadly defined as process of inviting subscription to
the securities of corporate issuer otherwise than through a
public offer
Private placement is an act of placing a new issue of
shares with select group of financial Institutions
(Dictionary of Banking and Finance)
Bloomberg defines a private placement as the
transferring of securities to a small group of investors.
The sale of a bond or other security directly to a limited
number of investors.an institutional investor like an
insurance co.antithesis of public offering.
Important feature is that securities are placed with few
select group of investors UNLIKE THE PUBLIC OFFER

Type Of Private Placement Objectives

Private Placement for Fund Raising
Venture Capital, Later Stage Private
Equity, Institutional and Non Institutional
Investors, Issue in International Market
With Strategic Objective JV partners ,
ESOP to Employees, Induction of Strategic
Partner, Reward shareholders with bonus
issues
Issue of shares is Private but no placement
as Such Still falls under broad category
of Private Placement

Types of Private
Placements
Private Placements

Private Placements made with

a fund raising objective
Early Stage Venture Capital
Later Stage Private Equity
Other Institutional Investors
Non-institutional Investors
International Capital Markets

Private Issues made with a

Strategic Objective
Promoters and Promoter
Group
Employees and Senior
Management
Bonus Issues
Introduction of Strategic
Investors
Induction of JV Partners

Assessment of Private Placement

Private placement market works well when
combined with the advantages of both the public
market for securities and institutional and bank
borrowing.
It does not have a stringent regulatory framework
that is applicable for public offers and at the same
time does not go through the due diligence of
institutionalized lending.
From issuers perspective, pvt placement provides
faster access to funds, less market uncertainties and
a more cost effective way of raising funds as
compared to public offers. There is also less
paperwork and administrative pressure on the issuer
co in satisfying process requirements.
From an investors perspective, pvt placement
provides lesser transparency and is therefore
suitable for informed institutional and HNI investors
than retail investors.

Comparison of Private
Placement (PP) vis--vis Public
Offer
Floatation cost Generally Less for
Private Placement

Valuation in Depressed Markets Better

through PP and Investors will get
sizeable chunk at fair price
Transparency and Compliance Less
with PP, but at the same time one to
one meet with Management Possible

Market Segments for Privately

Placed Debt
Private Placement of Debt
Securities

PSU Bonds
Bonds from
Banks &
Institutions

Corporate
Debt
Securities

Private Placement of Debt

PSU Bond market consists of debt securities issued
by public sector corporations set up under separate
statutes, govt cos incorporated under the Cos act,
local authorities and municipal bodies. For e.g. NTPC,
Sardar Sarovar Narmada Nigam, Power Finance
Corporation
The institutional bond segment consists of all India
and state level financial institutions and commercial
banks that raise funds through issue of SLR and nonSLR bonds
Corporate Debt market consists of private sector cos
that issue privately placed debentures of financial
institutions, banks and other investors.
Repos and Reverse Repo by RBI is a separate
segment

Market Segments for Privately

Placed Equity
Private Placement of
Equity

Venture Capital

Placements to other QIBs

and Non-Institutional
Investors

Institutional
Private Equity

 The main investors in the private market

are qualified institutional buyers such as
banks, insurance cos, mutual funds,
registered venture capital funds, foreign
institutional investors and others.
Unregistered foreign private equity
investors also form a significant part of
the investing community in privately
placed equity

Instruments used in Private

Placements
In equity placements, pure equity is generally
the preferred option
Convertible structures such as warrants with
options and convertible preference shares are
also used.
The private placement market for debt consists
of medium to long term debt securities like
debentures and bonds
In recent time, a new segment of privately
placed corporate debt has come which is
securitised paper (PTCs-Pass Through Security)
being issued as part of securitisation deal.

VENTURE CAPITAL
Venture Capital rightly called as Financing of
Innovation is the financing of start-up (young)
businesses with a view to grow them into
large commercially successful businesses.
capital for investment which may easily be
lost in risky projects, but can also provide
high returns; also called the risk capital
Bloomberg defines: An investment in Startup business that is perceived to have
excellent growth prospects but does not have
access to capital markets. Type of financing
sought by early-stage cos seeking to grow
rapidly.
Yahoo, e-Bay, Biocon , i-Flex Solutions,
Sasken, Apple, CISCO

Attributes in a Business Plan

looked for by a Venture
Capitalist

 Sunrise Sectors Information Technology (IT)

was a sunrise sector of the past, Water
Treatment may currently be Sunrise sector
An exciting concept that has the potential
for an uninhibited market
A concept that significantly improves
existing processes and applications
Cutting edge technology that provides Entry
barrier for competitors and sustainable
advantage for long duration
Business/company has Management
Bandwidth to take on challenges and
transform into Large / Scalable business in
future

CONTD.
A business or technology that has a first
mover advantage which can be harnessed
adequately before competition catches up
Business has a possibility of Take Over by
the Business Leader Hotmail acquired by
Microsoft
Business that has significant entry barriers
for the competition
Multiple exit options in the business will
find favor with a VCs

Institutional Private Equity

The term private equity is commonly associated
with the institutional investors that cater to the
requirement of equity capital by cos otherwise
than through public offers
Later Stage Financing Company is established
and ready to expand
Equity is placed with Private Equity players
Blackstone, Warburg Pincus, ING, Citigroup - could
be stand alone PE or arms of Investment Bank
Requirement of the funds is larger than the VC
stage, return expectation are moderate as risk is
less compared to start up stage investment could
be in sectors other than sunrise sectors

The Private Equity Spectrum

PRIVATE EQUITY PHASE

VENTURE CAPITAL

Seed
Stage

Early
Stage

IPO

LATER STAGE
(Growth Phase)

CONSOLIDATION PHASE
(PIPE Financing Strategic
Sale, LBOs)

GROWTH PATH OF A COMPANY

Private Investment in Public Equity

(PIPE)
According to Bloomberg, Private
Investment in Public Equity occurs when
private investors take a sizable investment
in publicly traded corporations. This
usually occurs when equity valuations
have fallen and the company is looking for
new sources of capital
When Private equity is infused into a listed
company it would be classified as a PIPE
investment.

Character of a PIPE
Private: A PIPE is a private placement transaction
between a limited group of investors and a listed co
Investment: A PIPE is a direct investment in a co.
Securities are issued directly by a issuer co, and
the proceeds from such investment go to that co
Public: A PIPE is used by a listed co to raise capital.
These have to be differentiated from private equity
raised by unlisted cos because there are several
regulatory restrictions on PIPE financing.
Equity: A PIPE is an equity or equity linked
investment, i.e. securities that involve an equity
component and securities that are convertible or
exchangeable into equity.

Contd..

Occurs when Large chunk of Investment

is done in Listed companies looking to
Expand
In depressed market conditions
valuations are attractive
Refers to the Investment in Listed
Companies by Private Equity Players
Controlled by SEBI in India for Listed
Companies in India
Regulation and Compliance for PIPE is
Higher than the Private Placement of
Equity in Unlisted or Private company

STRATEGIC EQUITY INVESTMENTS

Strategic equity investments are made by
investors in a co with business objective
rather than an investment objective.
From the issuers perspective, a co invites
strategic equity with a view to further its
business interests rather than to raise
capital.
Broadly, strategic equity investments can
be classified as acquisition of strategic
minority stakes, joint ventures and technofinancial collaborations.

Strategic Equity Investment

Acquisition of Strategic Stake - Primary Motive
is not to raise capital but achieve a strategic
objective like Technology Transfer, Entry into a
Market, Have representation on the company
to procure key raw materials. Buying of
minority stake and not control of the company
JVs Equity JVs or Agreements Joint Control
with Both the Partners exercise equal control.
Could be a SPV with separate books of
Accounts. Maruti Udyog Ltd. And Suzuki Motor
Company

contd
Techno Financial Collaborations: Financial foreign
collaborations in the Indian context are associations
between resident Indian cos and their foreign
counterparts for exchange of technical and/or
financial inputs for mutual benefit.
Techno-financial collaborations involve a wide range
of transfer of inputs in the following areas
Transfer of scientific technology, designs and drawings,
technical specifications, skills, know-how and scientific
intellectual property
Contract for training of the technicians
Supply or fabrication or help in sourcing of critical equipment,
plant & machinery components, raw materials etc
Investment in the equity of the indian co through cash or
through supply of capital goods or through technology
transfer.