In a private placement, such as to angels or venture capitals, securities are sold to one or a few investors (usually institutional investors) rather than to the public at large.In a public offering, securities are offered to the general public and must be registered with SEC.. . Private Placement vs. Public Offering.
3. Advantages of Private Placements Not subjected to SEC registrations
Lower flotation costs
5. Venture Capitalists Managers of fund are called venture capitalists
Venture capitalists (VCs) sit on boards of companies they fund
8. Functions of Venture Capital Fund Financing
Enhance performance by staged financing
Go to public, be acquired, or exit in other ways
9. Allocation of Venture Capitalist Time
14. Steps of an IPO Select investment banker
File registration document with SEC
Choose price range for preliminary (or “red herring”) prospectus
Go on roadshow
Set final offer price in final prospectus
15. A negotiated deal.
The competitive bid process is only feasible for large issues by major firms. Even here, the use of bids is rare for equity issues.
It would cost investment bankers too much to learn enough about the company to make an intelligent bid.
16. Most offerings are underwritten.
In very small, risky deals, the investment banker may insist on a best efforts basis.
On an underwritten deal, the price is not set until
Investor interest is assessed.
Oral commitments are obtained.
17. Since the firm is going public, there is no established price.
Banker and company project the company’s future earnings and free cash flows
The banker would examine market data on similar companies.
18. Price set to place the firm’s P/E and M/B ratios in line with publicly traded firms in the same industry having similar risk and growth prospects.
On the basis of all relevant factors, the investment banker would determine a ballpark price, and specify a range (such as $10 to $12) in the preliminary prospectus.
19. Roadshow Senior management team, investment banker, and lawyer visit potential institutional investors
Usually travel to ten to twenty cities in a two-week period, making three to five presentations each day.
Management can’t say anything that is not in prospectus, because company is in “quiet period.”
22. First-day Overperformance For 75% of IPOs, price goes up on first day.
Average first-day return is 14.1%.
About 10% of IPOs have first-day returns greater than 30%.
For some companies, the first-day return is well over 100%.
23. Why are IPOS underpriced? Winner’s Curse Theory
Informed investors can pick undervalued stocks, but uninformed investors can not. When informed investors do not have sufficient wealth to purchase the shares of all IPOs, issuers need to underprice their IPOs to attract uninformed investors.
26. Long-term Underperformance Two-year return following IPO is lower than for comparable non-IPO firms.
On average, the IPO offer price is too low, and the first-day run-up is too high.
27. Direct Costs of an IPO Underwriter usually charges a 7% spread between offer price and proceeds to issuer.
Direct costs to lawyers, printers, accountants, etc. can be over $400,000.
28. Indirect Costs of an IPO Money left on the table
(Ending price on first day - Offer price) x
Number of shares
Typical IPO raises about $70 million, and leaves $9 million on table.
Preparing for IPO consumes most of management’s attention during the pre-IPO months.
29. If firm issues 7 mill. shares at $10, what are net proceeds if spread is 7%? What is the money on the table if the first day’s closing price is $11.2? Gross proceeds = $10 x 7million = $70 million
Underwriting fee = 7% x $70 million = $4.9 million
Net proceeds = $70 - $4.9 = $65.1 million
Money on the table
= $1.2 * 7 million = $8.4 million