Private securities are securities that are issued to institutional investors in private placements instead of a public exchange. They do not have an active secondary market, are extremely illiquid, have no market-determined value, hence, each trade takes place after negotiation. Since private companies are not required to publish their financial statements, limited public information is available for such securities.
There are three types of private investments: venture capital, leveraged buyout and private investment in public equity (PIPE).
Venture capital investments relate to early-stage companies that need capital for expansion. Venture capital investors include family and friends, rich individuals and private equity funds. Venture capital investments are typically for a long time period, 3 to 10 years, and have an exit plan.
Leveraged buyout refers to a transaction in which management and/or a group of investors buy the whole of a company’s public equity using debt. The transaction effectively takes a public company private, turns it around by restructuring it and takes it public again. Typical candidates for such transactions include companies with a large amount of undervalued assets and high cash flows.
Private investment in public equity (PIPE)
Private investment in public equity (PIPE) refers to a transaction in which a public company is in urgent need of funds and it issues a block of shares to a private investor(s) at a significant discount.
Even though the market for private investment in equity is relatively smaller than public equity, it has grown considerably. The long-term view of the private equity investors given them considerable flexibility in addressing any underlying operational problems of a company. The long-term horizon makes convertible preference shares the most common means of financing for private equity because it offers upside potential in addition to fixed dividend payments.
Advantages of going private
Going private has the following advantages: (a) it relieves the pressure on management for short-term results and helps them focus on long-term, (b) it saves significant regulatory compliance costs. Its disadvantage is that the lack of coverage by analysts etc. deteriorates a company’s corporate governance.