Equity Placements

Searching for the most profitable way to finance one's business is a question of major significance nowadays. Equity placements are a quite recognizable and preferred way of capital injection, reaching its peak period between the years 2005-2007. In 2007 alone, $686 billion of private equity were invested around the globe, nearly doubling the investments made in 2005.

The popularity of equity placements among entrepreneurs and developers has encouraged the establishment of companies that specifically deal with equity transactions and solutions. Qualifying for a traditional loan from a bank could be problematic and time consuming, especially for a starting business. Therefore, it is crucial to find the right way to present your product to potential investors, especially if you are not publicly registered on a stock exchange, so as to obtain new capital. Companies that specialize in equity transactions will carry out the entire process of the placement, selecting investors and business owners whose financial plans and aims make a perfect match. This long process involves several phases. In the beginning, a detailed resume of the company's structure, business plan, financial model, and future projects is prepared, focusing on the benefits and advantages of investing capital in its business activities. The resume is then presented to carefully chosen potential investors and finally, the preliminary agreements and other paperwork are signed. According to the Private Equity International magazine, the number 1 private equity firm for 2009 was TPG, followed by Goldman Sachs Capital Partners, the Carlyle Group, Kohlberg Kravis Roberts, and Apollo Global management, being the top five. Private equity firms usually operate through private equity funds, established by the general partner and an investment advisor. Over a period of 3 to 5 years, the firm establishes a new equity fund.

There are several investment strategies to keep in mind if you consider investing in private equity. These are usually used by investors - mezzanine capital, leveraged buyouts, venture capital and growth capital. Venture capital refers to equity capital which is provided to companies in early stages of development, in the beginning of the life cycle of a new product or a technology. Due to the fact that investing in an unknown product is risky and uncertain, investors receive high returns as compensation for the risk they had taken. Growth capital stands for equity investment in established companies that are looking for ways to enlarge their production capacity or enter new markets. Although the company may have already reached a reasonable profit level, it is usually unwise to fund major expansions on its own, without additional equity placements. Growth capital is also used to restructure the balance sheet of a company and in particular, as means to reduce the amount of debt the company has incurred. Growth capital may be structured in the form of preferred or common equity. The capital is provided by buyout firms, growth capital firms, and venture capital investors.

Mezzanine capital refers to subordinated debt which is payable after all other debts if a company closes. Mezzanine capital is either in the form of debt or preferred stock. This form of financing is typically used by small size companies and involves greater leverage levels. Leveraged buyout refers to the use of significant amount of borrowed capital for the acquisition of a company. In the typical case, the assets of the new company are used as collateral so that loan is granted for its acquisition. Leveraged buyouts help companies to carry out acquisitions without investing huge amounts of capital. The ratio between debt and equity is usually 90:10. The bonds that are issued for a leveraged buyout are called junk bonds due to the considerable risk involved in them.