Private locations and Reg D deals
Private investments are a great alternative for companies to raise capital. Permitted by Regulation D, also known as Reg D, companies can seek capital from individual investors. Typically, these individual investors will need to meet the Reg D accredited investor requirements.
Private investments are used for various purposes. Businesses can take advantage of a regular offer to obtain debt or equity. With companies facing pressure from their banks to refinance or provide some type of credit enhancement, companies can turn to private markets for solutions.
A private location can be used in this scenario in two ways. One would be to refinance the bank entirely by issuing senior notes. The other solution could be to issue subordinated debt and use the proceeds to pay the bank up to your comfort level. While it is beyond the scope of this article, know that the cost of subordinated debt is significantly higher than bank financing. However, with that said, the cost can be acceptable if you want to get your business moving forward.
Private investments can also be used to raise capital for a business. This capital can be used for the start-up of a new company, to make an initial acquisition of a company or to finance the growth of a company. Equity will also need to be increased to satisfy banking requirements. In the second example above, if the capital structure of the company does not allow the issuance of additional debt, the company must issue shares. And again, the cost of raising equity is significantly more expensive than the cost of issuing subordinated debt.
Real estate professionals can also tap into private markets to raise capital for their real estate transactions. This can be achieved in two different ways. One would be to raise a fund whereby the “sponsor” or fund manager would invest the money committed to the fund based on predetermined criteria (such as type of property, size of investment, whether investments are leveraged or not, and location). This type of scenario provides the real estate professional with a pool of capital ready to seize opportunities.
The other way the real estate professional can use a private placement is to raise deal-by-deal capital. So instead of gathering a “blind pool” of capital and then looking for opportunities, the real estate professional first identifies an opportunity and then increases capital. The benefit for investors is that they have a say in whether they want to invest or not, unlike the fund scenario.
Private investments are a little-known alternative for companies to raise capital. Businesses can generate debt, equity, or both to meet capital requirements. Capital raised from private investments can be used for any business-related purpose. Real estate professionals can also use private investments to raise capital for their real estate transactions.