Private placements are a great alternative for businesses to raise capital. Permitted under Regulation D, also known as Reg D, companies can seek capital from individual investors. These individual investors will typically need to meet the accredited investor requirements of Reg D.
Private placements are used for a variety purposes. Businesses can take advantage of a reg d offering to raise debt or equity. With businesses facing pressure from their banks to refinance or provide some type of credit enhancement, business can turn to the private markets to find solutions.
A private placement can be used in this scenario in one of two ways. One would be to refinance the bank completely by issuing senior notes. The other solution could be to issue subordinated debt, and use the proceeds to pay down the bank to where their comfort level is. While it is beyond the scope of this article, know that the cost of subordinated debt is HULT PRIVATE CAPITAL significantly more than bank financing. However, with that said, the cost may be acceptable if you are to move your company forward.
Private placements can also be used to raise equity for a company. This equity can be used for a new business start-up, to make an initial acquisition of a business, or to finance the growth of a business. Equity will also need to be raised to satisfy bank requirements. In the second example above, if the company’s capital structure does not permit the issuance of additional debt, then the company will need to issue equity. And again, the cost of raising equity is significantly more expensive than the cost of issuing subordinated debt.
Real estate professionals can also tap the private markets to raise capital for their real estate transactions. This can be accomplished in a couple of different ways. One would be to raise a fund whereby the “sponsor”, or manager, of the fund would invest the money committed to the fund based on predetermined criteria (such as property type, investment size, whether the investments are levered or not, and geographic location). This type of scenario provides the real estate professional with a ready pool of capital to capitalize on opportunities.
The other way real estate professional can use a private placement is to raise capital on a deal-by-deal basis. So, instead of raising a “blind pool” of capital and then looking for opportunities, the real estate professional first identifies an opportunity, then raises the capital. the benefit to the investors is that they get a voice in whether they want to invest or not, as opposed to the fund scenario.