It’s private placement week at Katusa Research.
As I mentioned on Monday, every essay this week is dedicated to helping you harness the incredible wealth-producing power of private placements. (You can read essay #1 here, essay #2 here, and essay #3 here).
In any field of knowledge, there is a language you have to learn in order to get along… a set of terms insiders use to describe what’s going on. The field of private placements is no exception.
In today’s essay, I’ll cover some of these critical terms
First, you need to know there are two kinds of private placements.
One, the “brokered” kind.
And two, the “non-brokered” kind.
In a brokered private placement, a brokerage house acts as a middleman between the company and investors. The broker raises the money from clients and directs it to the company. The broker receives a commission in the 6% to 10% range for performing this service.
This usually happens when it’s a large financial raise or when a junior needs the help of a broker to drum up interest.
Some brokers have large client bases who like to participate in private placements. Getting access to a large base of investors can make it attractive for a company to go down the brokered financing route.
The management teams who have large followings themselves can go down the “non-brokered” financing route and cut out the middleman (broker) to save on finance costs.
In a non-brokered private placement, the investors place their money directly with the company. This saves a lot of money on fees for the company.
Non-brokered financings are typically done by companies with access to good contacts and networks. They have “reach,” so they don’t need to pay a broker.
I prefer to participate in non-brokered financings. Cutting out the middleman means more money goes to the company.
Second, investors in private placements may face what is called a “lock up period.” This is a four-month window when the investors are not allowed to sell their shares. There are situations in which there are no four-month trade restrictions, but for most junior private placements there is a lock up period.
Lock up periods ensure private placement investors hold their stock for a period of time and do not “flip it” for instant profits. This rule somewhat promotes longer holding periods.
I have no problem with lock up periods. I invest in private placement deals where I like the long-term prospects of the company. But the lock up period is something every investor should be aware of.
Third, as an investor in private placements, you need to always keep in mind the familiar term “there are no guarantees.”
Investing in a company through a private placement is not a guarantee of success. It carries the same downside risks as investing in a company through conventional means.
In order for me to participate in its private placement, a company has to meet all the same rigorous requirements I have for every other investment. It must be piloted by skilled managers who own substantial amounts of company stock (skin in the game). It must have the right financial structure. It must be operating in the right places in the world. It must be a good value.
I always include this warning – there are no guarantees – when I tell people about private placement investing. Private placements are such great investment vehicles that it’s easy to forget they carry risks just like other investments do.
Brokered financings… non-brokered financings… lock up periods… there are no guarantees. Now you know the key private placement terms and what they mean.