Question

Explain the difference between public placement and private placement in investment banking. What are the advantages and disadvantages of each?

Answer 1

Private Placement:

Private placements are also called as non-public offerings where a company sells stocks, bonds, or securities directly to investors without offering them for sale on the open market (IPO, FPO etc.).

Generally, companies approach high net-worth individuals, insurance companies, private equity firms.
Advantages:
• Helps in raising funds very quickly and with lesser investment of both time and money
• Gives flexibility in selecting the investor which stays for long-term, has similar objectives and bring some synergy and business acumen on the table along with funding
• Less regulated and companies don’t provide as many disclosures to their investors and can keep the funding process confidential

Disadvantages:
• Number of potential investors are very limited
• Company might have to offer the security at a substantial discount for luring investors to stay invested for the long-term and/or to compensate for the synergy/business acumen they bring with them
• Impact on the valuation of the company because of the reduced market for securities

Public Placement:

Public Placement or Public Offering is when the security of the company offered to the public for sale in order to raise funds. The common types of Public offerings are:
• IPO: Initial Public Offer when a private company is selling its equity shares for the first time to the public and its shares get listed on a stock exchange
• FPO: Follow on Public Offer when a listed company offers equity shares for sale
Public shareholders also gain the right to vote on future decisions of the company.

Advantages:
• The market is very large for fundraising since its offered to the public
• Increases the public’s awareness of the company and its products hence give boost to sales and brand credibility
• Not much interference in the business decision-making process since shareholding is scattered across public and no single shareholder (ex. promotors) will be in a position to influence or veto on any proposal for their vested interests.

Disadvantages:
• Public offering requires a lot of time and money investment. The company needs to be compliant with multiple regulations, they have to hire investment bankers, underwriters, print prospectus, conduct road shows etc.
• It leads to loss of confidentiality, flexibility, and control as the company has to disclose all operating and business sensitive details to the public like sales volumes, margins, markets etc.
• Focus on short-term profitability increases since the public investors are mostly looking for quick returns. This blurs the vision towards the long-term profitability and innovation.