Even though a publicly-traded company has access to the equity and debt capital markets, the conditions in the public markets are not always ideal for raising money. By selling shares in a private placement, a company doesn't have to register the shares with the U.S. Securities and Exchange Commission and can raise money more quickly. Private equity investors buy the assets of companies that don't list shares in the public markets. Private equity firms could very well participate in private placement deals.
When a publicly-traded company sells shares of stock in a private placement, it can also be known as a PIPE -- a private investment in public equities. Privately-held small businesses can also perform private placements as a means to raise capital without the expense of an initial public offering. In a private placement, an issuer sells equity or debt to a select group of private investors. In exchange for buying private securities that aren't as easily traded as public investments, private placement investors are generally offered incentives, such as a discounted price.
Private equity generally involves the formation of an investment fund in which the capital of multiple investors is combined. The private equity firm then proceeds to make investments in individual assets or through buying out entire companies, which could include publicly-traded companies that are converted to the private sector. Much of the time, the businesses that private equity firms invest in are distressed, or financially troubled, and yet private equity is known for adding debt to its target companies to perform takeovers. The private equity firm seeks to improve the business and eventually sell those assets in some manner for a profit.
A primary risk in a private placement is the potential lack of liquidity in shares. If private placement investors want to sell their shares for cash sooner than planned, there's no guarantee that there will be a buyer. In the public markets, investors have the support of market specialists matching buyers with sellers. A lack of liquidity is a risk that investors in private equity funds face because it usually takes several years before profits materialize.
Private Equity Prestige
There's another factor influencing private equity, that of prestige. Private equity investors are the top of the financial food chain. The New York Times reports that young Wall Street bankers prefer a career in private equity over work in other financial sectors. Not only is the money excellent with the potential to become very rich, but private equity firms actively recruit "the best and the brightest" for their businesses.
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