Unpack key topics that impact banking, investing, financial services and the wider economy in this award-winning explainer series.
When a company decides to go public, it often makes headlines. But recently, more privately owned, fast growing, typically tech enabled businesses are turning to private capital markets, or PCM, to raise capital in order to keep growing. Take a look at this graph which shows the exponential growth in PCM over the past 10 years.
What is PCM? And why has this strategy become so popular? Simply put, private placements are a way for a private company to raise capital from investors without having to go public. It's becoming more common with businesses that are scaling fast, both small and global.
Let's say your family invests in your e-commerce startup in exchange for a small stake in the business. That's a PCM transaction. Within investment banking, think of PCM as another product, just like mergers and acquisitions. Here's how it works.
Your e-commerce business is becoming popular and growing fast. You open pop-up shops around the country. You have a loyal customer base, and you want to expand, move into a new region, control the supply chain, and even sell your shoes in national department stores. But to make all this happen, you need more capital.
Going through an initial public offering isn't an option right now, because you would prefer to stay private for another few years. This way, you can spend more time growing your business without the same level of scrutiny a public company receives. It could also mean more value for early investors.
So it's been catching on. In 2020, there were more than two times the investments in the private market than the public market. Although the technology and health care sectors represent about 2/3 of companies that are funded in the private market, PCM is an option for any industry. It's also an option for companies of all sizes, whether small or global.
The strategy has become popular for a few reasons. First, there is a lot more capital available. Historically, large private investments in new companies mostly took place through venture capital firms, which primarily focused on startups and small businesses with long term potential.
Secondly, a number of top internet companies were able to successfully scale their business in the private domain before going public. Today, there are many more types of private investors, like family offices, private equity firms, mutual funds, hedge funds, sovereign wealth funds, and pension funds. This means there is an abundance of capital now accessible to fast growing companies.
From a private investor's perspective, the earlier they can own equity in a company, the more capital appreciation or value their share could earn. This will hopefully pay off when the private company goes public one day. But back to your business.
Many companies will work with an investment bank to tap into a global network of private investors. Depending on the amount a client needs, it could require a few rounds of funding and more than one investor. While you focus on the business, the team will reach out to private investors who could potentially be a good match. They'll share your success to date, your vision, where you want to go, and your innovative customer service plans.
Some important factors that make a good match include, does your idea resonate? Is your business model future proof? If you plan to take your company public one day, does your time frame align with an investor's?
Interested investors will perform their own due diligence. Things like visiting your offices to get a feel for how things run day to day, conversations with company leadership, and a closer look at your financials and contracts. Interested investors will submit their terms, and the PCM team will help to evaluate the proposals. After that, legal, accounting, and other teams get more involved to complete the transaction.
PCM has seen an incredible amount of momentum and it's expected to continue. What will the next 10 years bring?
When a company goes public, it often makes headlines. But recently, more private fast-growing businesses are turning to private capital markets. In 2020, there were nearly 2.5 times more investments in the private market than the public market – why?
The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein are solely those of the speakers and do not reflect the views of and opinions of JPMorgan Chase. This information in no way constitutes JPMorgan Chase research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.