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What Is a Private Capital Market?

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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 15 September 2019
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    Conjecture Corporation
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A private capital market is an avenue through which a company can raise money by issuing debt or equity instruments. Many major companies are listed on stock exchanges in which case transactions involving these firms are conducted in the public arena. Virtually anyone with sufficient money can buy a security issued by one of these firms. In contrast, transactions conducted on a private capital market typically involve minimal public disclosures.

Start-up businesses in many countries have a high failure rate and conventional lenders such as banks are often reluctant to lend money to these entities. Many small firms heavily rely on loans from the private capital market. Venture capitalists are private individuals who attempt to generate profits by lending money to firms and individuals engaged in new projects or speculative enterprises. These investors often charge higher rates of interest than banks but offer borrowers much more flexible repayment terms. In many instances, venture capitalists provide the only source of funding available to new businesses.

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Publicly traded companies sometimes turn to private capital markets to raise money for mergers and other projects that conventional lenders are unwilling to finance. This situation sometimes occurs when a multinational firm decides to expand its operations to a new country or region. Lenders in the firm’s home country are unwilling to commit funds to a project being carried out in a location where the lender has no business presence. Additionally, lenders in the other nation are often unwilling to lend money to foreign companies that have no previous track record of conducting business in that region. In such instances, either domestic or foreign-based venture capitalists provide the expanding company with the funds that it needs.

Aside from issuing debt instruments and securing loans, companies also turn to the private capital market to find new investors. Privately held companies often issue shares to employees and revenue created through the share sales is used to cover some of the firms operating expenses. Additionally, many small business owners raise money for company expansions by selling a portion of the firm to a private investor. Laws in many countries enable business owners to sell partial ownership stakes in a company to multiple individuals and those individuals can in turn sell their shares to other investors.

In many instances, transactions on the private capital market involve friends, relatives and business acquaintances agreeing to one-off business transactions. People who cannot find willing lenders or investors sometimes turned to brokers and private equity firms that match up investors with small businesses. These brokers typically charge a fee that either the borrower or the lender must pay. Many private equity firms actively contact wealthy individuals and business owners in the pursuit of new capital injections.

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