Private Placement, IPO and FPO in Investment Banking – In this 5th article out of the 9 series article on Investment Banking overview.
- Part 1 – Investment Banking vs Commercial Banking
- Part 2 – Equity Research in an Investment Bank
- Part 3 – What is Asset Management Company
- Part 4 – Sales and Trading
- Part 5 – Private Placements, IPOs and FPOs
- Part 6 – Underwriters and Market Makers
- Part 7 – Mergers and Acquisitions
- Part 8 – Restructuring and Reorganization
- Part 9 – Investment Banking Roles and Responsibilities
1) Investment Banking Program 99 Course Bundle, 500+ hours
2) Business and Financial Modeling (University of Pennysylvania)
3) Wharton Business and Financial Modeling Capstone (University of Pennysylvania)
4) Introduction to Finance: Valuation and Investing (University of Michigan)
5) Valuing Projects and Companies (University of Michigan)
We discuss the following in this article –
- Raising Capital by companies
- Role of Investment Bankers in Raising Capital
- What is IPO and FPO
- What is Private Placements
Private Placement, IPO and FPO in Investment Banking Video
Private Placement, IPO and FPO in Investment Banking trascript
Raising Capital in Investment Banking
Let us now move forward and another important function of an investment bank i.e. helping companies raised capital and capital could be different formats it could be through an equity dilution and it could be through loans so investment banks actually do both let’s look at first what is raising capital and how investment bank actually help them help the companies raise capital. Now let us understand another important function of an investment bank i.e. raising capital as you can see that there would be various companies who would be in need of cash in order to grow it could be related to certain set of project may be you know they want to kind of expand their space from national to kind of international of global presence so raising capital by corporate one of the key activities that they cooperates may do so they approach bank the regular banks for different credit based loans but they may approach investment banks for special set of needs. So what are those set of needs let’s kind of understand and how it functions so when we talk about you know companies wanting to raise funds from the market you know there would be an intermediary that we call that as investment bank.
Role of Investment Bank in Raising Capital
So what an investment bank does is that they match investors on 1 side with the companies and you know basically what happens is that once they match the advisory fee or the commissions are actually taken by the investment bank that’s why you know the investment banking salaries are really high because let say if you have done a deal of raising capital to an extent of let’s say 100 Million Dollars you know the advisory fee can be 2%, 3%, 4% and that could really mean a big number. So profitable business to be aim for the investment bank as advisory fee they earn a lot. So what happens regularly is that as I said these firms actually higher in investment bank and investment banks have certain advantages associated with it reason why they are kind of higher because they have access to investors so we are talking about institutional investors not only seating in let say New York but let’s say Singapore you know globally across Hong-Kong or Sydney or may be London investment banks have key network access to investors who may be interested in certain set of securities or investment in certain companies. 2nd is that they have expertise in enterprise valuation so let say if a company wants to raise capital you know they may share their own set of equities. So what is the price at which they should share equity? So that’s what they essentially do and essentially expert negotiator so they negotiator both side as well as buyers as well as on the seller side so they also bring experience you know to company for the companies come to market just to given an example when a company would like to raise funds from public there would be certain set of procedures that needs to be followed or regulatory aspects that needs to be looked at will the company be able to do it on their own with delimited staff it will be kind of very difficult No. 1, 2nd they may not be equipped with right skill seats to actually go to market or by loan so in most cases in fact is almost every case you will find investment bank representing the company to kind of go to the market so in order to go to the market you know and raise capital it can be done by using I mean doe in many ways say first one which is again very important is issuing of new securities so one example could be that you know Facebook issued its IPO so they wanted to a raised capital for growth and they did that likewise Twitter so Twitter is also a coming up with IPO. So that’s what you know issuing of new securities would mean and these issuing of security will be represented by various investment banks. So it could be JP Morgan, Morgan Stanley just a name a few. 2nd could be that issuing capital I mean raising capital by issuing bonds that can also be one of the features so the reason could be various set of expansion with companies may be doing or to finance certain set of projects you now reasons could be many and investor bankers are actually apt for representing these things to the market.
What is an IPO and FPO?
So Now that we have understood how investment banks help company raise capital as we also looked at that one of the ways of raising capital was through equity dilution so let’s look at IPO’s FPO’s which is means that you know there would be equity raising of capital in a bit more detail. So let us now understand the meaning of what exactly the investment banks do when we talk about IPOs and follow on IPOs. So it’s called an IPO and FPO. When we talk about IPOs we are essentially saying that you know there is private company that means it’s a privately health company and the let’s say there are only limited number of share holder who have actually started the firm they will be called us founders. Now when a private company actually grows big obviously they would they may require funds to kind of finance their are growth they can be different routes associated with financing there growth it could be that bank may be a ready to kind of lend the appropriate amount of money if the bank is probably not in a position to lended because of you know that company being too risky for the timing private companies can also evaluate you know going to the market now what it means is that you know the private company which is closely health that means 100% of the share holding is between the founders and the initial set of investors now this founders and initial set up investor and now willing to share their stake in the company with outside investors so what do you really understand by outside investors so outside investors are those investor like you and me OR may be other institutional investors so if that happen we are saying that private company has gone public because they have shared their share holding with others likes you and me so this is where the investment bankers actually come into picture and the shares of this public company is basically then given to the public so it looking at so it could be 25%, 30%, 35% etc… and it will also depend on the amount of funds that they want to raise and this brings to very important question here that you know when IPO is talked about we must understand that why an IPOs actually required is it required for growth is it required for acquisition and what rules to investment actually play here take care of the regulatory aspects the talk about the valuations they help in preparing the prospectuses they know the processors how do talk to ACC follow their own rules and regulations and they kind of ensure that the IPO is successful so what do you mean by IPO being successful IPO being successful means that they the IPO was fully subscribed. So if there is no investor interest obviously IPO will not the successful. So investor bakers job is also to kind of ensure that the road shows are organized investors are made aware search in IPO and they interest generated as such so investment banking guys work a lot and the IPOs and they charts percentage of the amount that is raised it can really big at times for the is investment banks in terms of commission or advisors fees. So let’s look at what exactly is a follow on IPO. A follow on IPO is just another set of you know IPO I mean not an IPO but another set of stock offerings by the company which is already public. So say for example there is a company who has already gone public had shared 25% of its equity with the public. Now they want to raise for the funds and they do want to do it through traditional loan and banking way where you know debt is raised they want to share the equity with the public. So earlier there was 20, 25% that was shared. Now they want to share another 15%. So we are saying that again a follow on offering may come in the public and that will be called as FPO. So again extra number of share will be issued and the public will have at least a benchmark because you know the share would have already been traded so we would also know that at what price these share would come and what is the market price and how these follow IPOs are being evaluated or valued. So all the information’s are critically available and investment banks actually help a lot again here to make here this FPO a success. So with this we have understood that IPO leads to equity dilution which means that investors are normal retail investor it could be public like you and me and it could be institutional investment and it could be institutional investors but there is another category through which you know equity dilution can actually happen but the company is may not want to actually go to the public for that so something called private placement you are just having diluting, equity and raising capital through select investor so what do they actually mean called as private placements.
What is Private Placements
So let us look at another important function of an investment bank that is private placements. So what exactly do we understand by private placements. Now think about you know raising capital from the public as well as from different sources many companies actually you know sale their securities that means you know they look forward to diluting their stake but only to a selected number and small number of investors not to the general public like you and me. So you know may be to a bank may be to mutual funds or institutional investors insurance companies. So what essentially this means is that a small number of investors may invest large amounts to own this company may be 10% each and this is called as private placements so what are investment banks actually does here is that they connect is in institutional investor to companies and help them achieve their goal of raising capital through this private placement opportunity window now you may be wondering that why a company may actually look at private placements there could be a reason associated with it. The company may not be very big they may not have an appetite for an IOP. So IPO comes with lot of person calls one of them being that let’s say down side could be that since if you are listed then your sharing your answerable to more number of share holders in terms of at least absolute numbers and you know you have to regularly file you are then in the purview of SSC and then may you have to file regularly portly filings you know have minimum number of disclosers and all these regulatory aspects are to be taken care of when you are going through an IPO and you made your company pubic but this may you not to be true for the private placement company. So there could be certain reasons so as I said the company may not even prefer to actually go to public. So that’s about it for you know the reason of why Private Placement? With this we have now understood investment banks actually helps companies’ raise capital.