The lowdown on Private Placements

Wednesday, 26th October 2016 10:25 - by Tom Britton

Secondary offerings -  What you need to know: A secondary offering occurs with the issuing of new equity for a company that is already publicly traded on a market. Secondary offerings are often referred to as share placings, placements or ‘seasoned offerings’ and are typically used to attract new investors into a company.

Placings can either be private in nature or include a public element through a rights issue. With a private placing, the shares are only offered to a limited number of institutional investors and individuals who must all be brought on board as company insiders before they are able to invest, meaning they are privy to exclusive ‘inside information’. With rights issues, both existing and new investors can participate in the share offer with no need to make investors ‘insiders’, since the information about the raise exists in the public domain.

From a company’s perspective, placings are a much cheaper form of capital raise than debt, which necessitates interest repayment. In order to issue new shares through a secondary offer, a company will engage their NOMAD (Nominated Advisor) and broker to arrange the terms of the placing and to source the capital. As with IPOs, brokers tend to work solely with institutional investors on placings so they can cut much larger cheques.

Further, companies often offer the new shares at a discount to the current share price in order to incentivise investors to buy these instead of shares already trading on the market. While placings have regulatory restrictions designed to protect the rights of existing shareholders, it’s fair to say new investors can benefit by receiving shares at a discount that could range from nothing to 10% or more.

Companies use these placings to raise capital for ongoing growth, specific projects and, when times are rough, to keep from sinking. While existing investors will experience a small amount of dilution, a secondary offering does not always lead to a drop in the share price immediately following impact day – the date on which shares become available to the public. In fact, sometimes a placing can have the exact opposite effect, which was the case with 3i Infrastructure’s offer in May 2016. New shares were offered at 165p, a slight discount to the price at time of issue, and within a week the share price had risen by nearly 10%.

Next week I’ll continue this look at secondary offerings with a more detailed description of each of the players. The week after, we’ll take a look at what key factors an investor should look at before deciding whether or not to participate in a secondary offering. Stay tuned.