Recently we had the opportunity to attend the 29th Annual Private Placement Industry Forum on Debt Private Placements hosted by the PPIA down in sunny Florida.
During the conference, bankers and prominent private equity investors discussed private placements and the $60B in rated debt transactions that make up a significant portion of this growing market. These offerings, similar to a combination of bonds and bank loans, are being sold by creditworthy borrowers in the private market. They feature a longer duration like bonds and provide legal protections similar to loans.
We saw several common themes emerge: issuer preference for the flexibility of the private market, a growing demand for investors interested in investing in private placements, and the need for more efficient transaction management on syndicated offerings.
Private Market Flexibility
On the topic of private placement demand, Jamie Egbert of JP Morgan said that "...this is one of the most exciting times for private placements" and "...the buzz is growing in the private market." Jamie went on to further explain that JP Morgan saw a record number of private placements in 2015 with a particular increase in real estate transactions.
The bankers and investors in attendance discussed the importance of flexibility in a capital raise. Many highlighted the private market as being much more flexible than public debt issuances. For example, private placements can give issuers the ability to preserve flexibility for future changes to their debt capital structure since they can decide not to include TIA-mandated or similar covenant provisions.
Furthermore, private placements can provide financial flexibility in customizing the issuance to accomplish various strategic objectives within the capital structure, such as project finance for infrastructure deals or to better match revenue streams. Additionally, a private placement can provide flexibility in optimizing tax efficiencies.
Growing Investor Demand for Private Placements
Investor demand represents more than $100B of these types of private placements, however the supply and market education is lagging behind. Some of this demand comes from insurance companies that buy private placements to put cash proceeds into premiums paid. This produces a yield over a longer time period so insurers are more diversified and can effectively return benefits on their policies. In order for insurers to put private placements into their portfolio, the convention is to have the offering NAICS rated, where ratings of NAICS 1 & 2 are investment grade and 3 & 4 are not (similar to public bond ratings of investment grade or non-investment grade).
Need for Efficient Transaction Management
The average transaction size for a rated debt offering was stated to be around $225M. Often there is only one or a handful of institutional investors participating in this type of private placement. However, some deals are syndicated across banks and private bank clients with many wealth managers and investors participating. This results in deal managers having to coordinate among different parties and handle many different sets of documents. This presents an opportunity for a better institutional private placement platform for transaction efficiency as well as a dealer-to-dealer network solution for managing a coordinated offering.
Most interestingly, conference participants were polled during the event for their thoughts about the current outlook on what they expect private placement deal volume would be in 2016 compared to 2015. The majority of attendees said that the private placement sector would be about the same or larger in size and volume. The results of the poll highlighted the resilience and non-correlated nature of the private market since it was taken on a day where the S&P 500 was down more than 2% and broader markets had been in decline over the past month.
*The figures stated above were expressed as part of the conference discussion and observed directly by the attendee.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.
Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.