Private Placements and Private Equity: (CHAPTER 11 & 12)

PRIVATE PLACEMENTS
AND PRIVATE EQUITY

(CHAPTER 11 & 12)
PRIVATE PLACEMENT
 Process of inviting subscriptions to the securities of a corporate other than through a public offer
 Section 42 of the Companies Act 2013 defines Pvt. Placement as any offer of securities or invitation to
subscribe securities to a select group of persons by a company.
 Pvt placements can be made both by listed & unlisted cos.
ASSESSMENT OF PVT. PLACEMENT
Issuer's perspective-
 Less time taking process
 Less stringent regulations
 Less rigorous due diligence
 Low Cost Execution
 Diversification of Financing Sources
 No Ratings needed
 Competitive Pricing
 Familiarity with Lenders – Informed Investors
Investors perspective-
 Good stake at attractive prices during bleak markets.
 Access to management information
 Portfolio Diversification
 Relationship Investing
Private Placements - Overview
Private Placements
Listed Companies Unlisted Companies

Private Investment in Public Equity Venture Capital
(PIPE) Private Equity
Qualified Institutional Placement
(QIP)
Institutional Private Placement (IPP)
PIPE, QIP, PII
 “PIPE occurs when pvt. investors take a sizeable investment in publicly
traded corporations. This usually occurs when equity valuations have
fallen & company is looking for new sources of capital” –Bloomberg
 QIP (primary issuance of new equity) is channel for listed companies to
raise equity capital other than through public offers exclusively from
QIBs. QIP is identical to a PIPE except that it should be made only to
QIBs (so no NIIs).
 IPP is a limited purpose window opened by SEBI in 2012 to enable listed
companies to increase their free floats. Helps in diluting significant stake
of promoters through institutional investors in an off mkt mechanism. IPPs
used by govt. disinvestment to sell off stakes in large listed companies.
DISCLOSURES REQUIRED IN OFFER DOCUMENT OF PP
General Information about the Company
Factors that directly impact the business of the Company
Details of default, if any, including therein the amount involved, duration of default and present
status, in repayment of –
I.statutory dues;
II.debentures and interest thereon;
deposits
III. and interest thereon;
loan
IV. from any bank or financial institution and interest thereon.
Details of Issuance of Securities

Disclosures with regard to interest of Directors, Litigation etc.
Financial Information of the Company
PVT PLACEMENTS & ROLE OF IBANKS
 Pvt. Placements are mostly organized by IB acting as “arrangers”

 Pvt. Placement of equity & debt is a major transaction advisory &
intermediation service rendered by IBanks
 Appointment of merchant banker is mandatory in QIP under ICDR
Regulations
 Prepare pvt. placement related documents required under ICDR
 Perform due diligence of the issuer company
 IBs role in pvt. Placements is to determine mkt sentiment to a proposed
offer, secure mandates on the basis of their institutional network &
placement capabilities
PVT PLACEMENTS & PRACTICAL CHALLENGES
 Difficulty in Finding a suitable investor – First and foremost, the disadvantage

of a private placement of shares would be to find a suitable investor. Further, the
investor may have a limited amount of funds to invest and may set certain targets
to be achieved whereby he would invest the funds.
 Higher Returns Requirement – The investors may require more return because
of the risk they are taking by investing privately.
 If the investment is for private placement bonds, they may ask for higher interest rates or
annual coupons because of the risk they take for unrated bond securities and illiquid
securities.
 If investment in a private Company is by an issue of equity shares, they may ask for higher
equity ownership or board positions because of the liquidity risk of their investment.
PVT PLACEMENTS & ITS IMPACT ON SHARE PRICE
 The private placement of shares, if done by a private company will not affect the
share price because they are not listed. However, for a public listed Company, this
placement will lead to a decline in share price at least in the near term.
 Let the number of shares outstanding before the private placement of shares by 10 million
and the Company has proposed to offer 1 million equity shares in the private placement.
Thus, this would result in dilution of ownership of the existing shareholders by 10%.
 However, such an impact can be seen only in the short-term, a long-term effect on
the price would take into account the utilization of funds by the Company raised
during this placement.
VENTURE CAPITAL
&
PRIVATE EQUITY
PRIVATE EQUITY SPECTRUM
The Private Equity Spectrum
PRIVATE EQUITY PHASE
VENTURE CAPITAL IPO
Seed Early Stage Later Stage Consolidation Phase

Stage (Growth Phase) (PIPE Financing,
Acquisition Financing
Strategic Sale, LBOs)
GROWTH PATH OF A COMPANY

VENTURE CAPITAL
 Usual features of venture capital backed business-
 Innovation driven business
 Market validation
 Concept selling
 Strong revenue model
 Business to be ramped up in phases
 High risk and reward relationship – go down progressively
 Promoters equity is more in intellectual capital- less tangible assets (soft cost)
 Involves cash burn
 Entrepreneurs who have a proven track records but no capital to fund their business plans.
 Venture Capitalist plays a high-risk high-return game. The expected returns could be as
high as 4x or even 7x. Investment horizon is usually of 5-7 years. IRRs could range
from 60% upwards.
PRIVATE EQUITY FUNDS – BUSINESS
MODEL
 Being later stage investors, PEFs step in mostly when the company’s market
and cash flow model have stabilised. Sometimes they enter at the pre-IPO
stage.
 PEFs are also active in picking up sizeable stakes through block deals and
negotiated deals in listed companies (known as PIPE deals).
 PEFs also take stakes in listed companies through the PIPE route and through
QIP deals (institutional route).
 One recent phenomenon is PEFs playing active role in acquisitions and buy
out deals either being the lead investors or strategic investors.
 PEFs are also beginning to show interest in investing in distressed assets
either through dedicated funds or through the buy out route from banks.
VENTURE CAPITAL VS PRIVATE EQUITY

FUNDS
PEFs are different from conventional VCs in the following respects –
 VCs provide early stage risk capital while PEFs provide later stage growth
capital.
 Deal sizes in VCs are small, typically 1-3 million USD. PEF deal sizes can
be very large even going beyond one billion USD (unicorn).
 VCs look for cutting edge business plans which can redefine a business or
product space. PEFs look for market leaders and strategic buys in any
business space including commodities.
 VCs look for exponential returns while PEFs are more like fund managers
looking at superior returns.
 Investment cycle usually 5-7 yrs for VC & 3-5 yrs for PE
PRIVATE EQUITY MARKET
INVESTMENT BANKING SERVICES IN VC/PE
 Business Advisory
 Formulation of Transaction
 Valuation
 Deal Structuring – Term sheet
 Offer literature
 Transaction Advisory (Identifying suitable investors then coordinating &
executing the deal)
TERM SHEET (DOCUMENT THAT LAYS OUT THE TERMS OF INVESTMENT &
COLLATERAL) IN VC/PE
 Anti- Dilution rights such as right to additional equity for old investors so that their stake remains same
 Tag along or co sale & Drag along or bring along rights
 Investor protection rights
 right of first offer: Allows a rights holder to purchase an property/stake before the owner tries to sell it to
someone else. If the rights holder is no longer interested in the property/stake, the seller can sell it to a third
party
 right of first refusal :Right that gives its holder the option to enter a business transaction with the owner
according to specified terms, before the owner is entitled to enter into that transaction with a third party
 Exit rights for investors such as liquidation preference & put option to compel the company or
promoters for a buyback of shares
 Veto rights on major corporate decisions
 Provision of periodic financial information
STRUCTURE OF PE FUND
RETURN AND FEES IN PE FUND
EXIT MECHANISMS FOR PE INVESTORS
 Cycles of PE/VC firm-> Fund Raising Cycle, Investment Cycle,

Exit Cycle
Exit Routes for PE/VC

 Taking the company public with IPO
 Strategic Sale
 Liquidation
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PRIVATE PLACEMENTS

AND PRIVATE EQUITY

Listed Companies Unlisted Companies

Factors that directly impact the business of the Company

Details of Issuance of Securities

 Pvt. Placements are mostly organized by IB acting as “arrangers”

 Difficulty in Finding a suitable investor – First and foremost, the disadvantage

The Private Equity Spectrum

PRIVATE EQUITY PHASE

VENTURE CAPITAL IPO

Seed Early Stage Later Stage Consolidation Phase

GROWTH PATH OF A COMPANY

 Cycles of PE/VC firm-> Fund Raising Cycle, Investment Cycle,

Exit Routes for PE/VC

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