Various large investors have sizeable portfolios and constantly seek suitable new investments. Businesses in need of capital approach such investors in an effort to work out a suitable deal. Private equity implies a sale of stock or preferred stock, but a variety of arrangements are possible. Venture capitalists are firms that specialize in investing in new start-up companies in the early stages before their product or service becomes successful or well known. They often take an equity position for their investment givng them shares in the company before it goes public. Often they are issued restricted shares which cannot be sold to the public. Once the company is large enough and successful enough to "go public" the company will do an initial public offering (IPO) of common stock to the public. Then those owning shares may sell them collecting their profits.
Private equity has been in the news recently in that banks who found their reserves depleted in the recent subprime mortgage debackle were able to attract new capital through private placements. Large international investors were reported to be the buyers. The new capital brought with it the issue of large numbers of new shares. That dilutes the voting power and earnings per share of existing common stockholders. Existing companies are likely to do private placements of common stock only in special situations. They are common for start-ups.
- Bond issue
- Common stock
- Earnings per share
- Go public
- Initial public offering
- Preferred stock
- Private placement
- Restricted share
- Start-up company
- Subprime mortgage debackle
- Venture capitalist
- Voting power
Recent Mentions on Fool.com
- 3 Companies That Could Slash Their Dividends
- 3 Reasons to Sell Annaly Capital Management Inc. and American Capital Agency Corp.
- Why You Should Think Buses In Brazil
- Warren Buffett's Investment Secret: Stick to What You Know
- Are You a Qualified Investor?
- A Simple Truth About Banks: Over the Long Run, Most Don't Make Money