What Is a Private Equity Offering?

In the financial markets, companies turn to both public and private investors to raise money for different purposes. A private equity offering is a deal in which private investors, including individuals and institutional investors, purchase an equity percentage of a business. This type of offering is not issued to the general public, and as a result, only a limited number of investors can participate. One reason for launching a private equity offering could be because a company is hurting financially.

Often, the equity shares that are sold in a private equity offering are priced at a discount. The savings are in comparison to where a public stock is trading in the financial markets. Companies apply a discount to make the offering more attractive, and it is especially effective if the issuer is in desperate need to raise capital.

The shares in a private equity offering are only offered to a select group of investors, and the public markets are not accessed. Companies that trade shares in the stock market as well as privately held companies may both sell shares in a private offering. The securities in a private equity sale do not have to be registered with a governing body in a region.

In addition to investors gaining an advantage by purchasing shares at a discount, a private equity offering extends benefits to the issuing company as well. By issuing shares in the private market, the issuer is bypassing the regulatory costs involved with filing shares in a public stock offering. As it is only a select group of investors that a private deal is open to, an issuer is able to design the deal in such a way that it is attractive to the targeted audience. The details of the issue do not need to be made public, and throughout the process, the issuer is developing investor relationships that could serve the company well when it comes time to sell additional stock in the public stock market.

While investment bankers are often engaged by a company when there is a public stock sale, a financial consultant typically leads the private equity offering process. The company may have an internal professional consultant, or it may seek a third-party firm for the job. Typically, a host of criteria are considered before making a consultant selection based on proposals submitted by the candidates. Factors may include the length of time needed to perform the private sale and the costs associated with hiring a consulting firm.