A private placement is essentially the private sale (or “placement”) of corporate debt or equity securities (or “issue”) by a company (or “issuer”) to a limited number of investors (aka lenders). The buyers are typically institutional investors, such as insurance companies.

The timeline for completing a private placement will vary based on the size and credit profile of each issuer as well as the specific private placement lender, however, it generally takes 6-8 weeks to complete the first transaction.

‍Deal Launch

The first step, Deal Launch, initiates the window of time from which the issue is offered to investors, to when a decision must be made, typically 1-3 weeks.

‍Negotiations

Next, the Negotiations step kicks off discussions between the issuer and the investor on the specifics involved with the investment, such as pricing or legal terms. Negotiations will continue to take place leading up to closing.

‍Information Gathering

During the Information Gathering step, the investor will complete their due diligence on the company, which often involves the following:

• Reviewing and verifying the company’s financial statements
• Meeting with the management team
• Assessing the company’s long-term outlook and market position
• Industry analysis

‍Investment Risk Analysis

At the Investment Risk Analysis stage, the investor will determine a credit rating for the company issuing the private placement, which reflects how capable the issuer is of making interest and principal payments. This process is similar to how rating agencies determine ratings for public bond issuers.

The lender will ask questions such as:

• How stable are the company’s revenues and earnings?
• How stable are input costs and operating expenses?
• How stable is the management team and how deep is the bench?
• Who are the company’s main competitors and what are the competitive dynamics of the industry?
• Who are the main customers, and is there any significant customer concentration?
• Is the company profitable? Why or why not?
• What is the long-term target debt to equity ratio?
• What is the long-term target debt to earnings ratio?
• What other debt obligations are outstanding?
• What is their track record for paying creditors?
• What is the company’s long-term growth strategy?

After answering these questions and performing a full analysis of the company’s financials, an investor can determine how much risk they feel is associated with providing capital to the company. Generally, the higher the risk, the lower the quality rating.

‍Pricing

Next, during the Pricing step, the investor determines what interest rate is needed to compensate for the associated risk. Private placements are priced similarly to public securities, where pricing is typically determined by adding a credit risk premium (or spread) to the corresponding U.S. Treasury rate.

‍Rate Lock

Once the company and the investor agree to a spread, they move to the Rate Lock step. This is when the private placement investor and the company agree to lock-in the interest rate (or coupon) based on the agreed upon spread and the prevailing U.S. Treasury rate at a specific day and time. For non-USD financing, the multi-currency swap would also be executed at this stage.

‍Closing

The final step, Closing, is the formal exchange during which the actual transfer takes place between the company and the lender; the issuer transfers the security that was offered to the investor in exchange for the capital the investor agreed to pay for it. The steps to closing very much resemble the process for establishing a line of credit with banks.

‍Although the process for issuing a private placement is less familiar than securing bank debt, ultimately, the two processes are quite similar. Furthermore, the relationship between the company and its lender, which developed during the issuance process will not end at closing, but extend throughout the life of the private placement (3-25+ years) and beyond.