IPO vs Private Placement – Compare Concept, Benefits, Drawbacks & more

This article has everything you need to know about IPO vs Private Placement. You can check how different and how similar these two sources of funds are.

A business can’t foresee long-term success if it doesn’t get the required funding for its operations on time. After all, a business isn’t about making money, but it is more about investing.

To simply put, a firm structures a framework with some spending to build a good income source.

And when it comes to a business operating at a large scale, investments are held in millions or billions of bucks.

There’s no surprise that an individual owner alone can’t afford such big investments, but one can bridge this gap by inviting investors.

They fund the company for the sake of high returns. Similarly, the company may utilize these funds to proceed with its business plans.

Whether it is a startup or a well-established firm, every company knows the significance of investors, for which they often consider going with the two most popular methods, Initial Public Offering (IPO) and Private Placement.

But what are these methods, how they assist companies? Here we discuss the distinction between both these alternatives. So let’s get started.

IPO vs Private Placement – Compare Concept

Compare IPO and Private Placement here –

What is Initial Public Offering?

Not every company’s owner in the initial phase of its business carries enough amounts to bear the expenses.

But this problem can be easily sorted out, mainly if the company receives funding via public, which is possible with IPO.

Initial Public Offering has always been the most enticing subject at such events. It is one of the most helpful ways by which a privately owned company goes public.

The company can issue and sell its shares Via IPO among aspiring investors to pile up the sufficient fund in return as much as required to run their businesses.

Though, the entire process of initial public offering is also a critical subject to be noted. The underwriters’ role during a company’s journey of going public may command the share prices.

Apart from this minor point, the IPO process comes with further rules that may make this discussion quite lengthier.

Hence, instead of going deep into it, let’s take a look at private placement, another popular alternative for a company aspiring to collect funds for its business.

What is Private Placement?

Private placement means a lot to startups or businesses in the growth phase. But unlike initial public offering, this method includes offering shares to the selected investors and limited investors only.

For instance, it is up to the company’s owner. They can seek financial support from family, friends, or interested investors to come and invest in your company.

To simply put, private placement enables the company to collect funds without going public. Also, anyone can join private placement as the method has no restriction.

Also, in contrast to other methods, it is deemed as less costly. No underwriter or other added cost is a problem in Private Placement.

In a nutshell, firms would like to go with a private placement alternative rather than Initial Public Offering if their business operational cost is less or their business plans don’t seek such a big investment.

Also, the owner has his own control over the company. That’s why merger and takeover events don’t arrive.

Now let’s take a quick glimpse of the pros and cons of both IPO and private placement to come up with the final conclusion.

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IPO vs Private Placement – Compare Benefits

Here’s that discussion that will provide you a detailed insight into both IPO and Private Placement and why companies consider it or avoid it.

Benefits of IPO

To be honest, the benefits of IPO may vary, which depends upon who is asking. If you are an owner of a small company, going with IPO seems to be illogical.

For instance, if you only need a few lakhs or crores for your company, you may go with another alternative and fund your business.

At the same time, if you run a big company with a turnover of more than Rs.25 crores, you can think about IPO.

You can pile up sufficient funds for your business, which sometimes may exceed more than your expectations.

IPO can be a powerful way to fund a business, and you can ensure higher liquidity to the existing shareholders of your company.

Benefits of Private Placement

Just like IPO, private placement also comes with its own unique advantages. Companies can choose potential investors on their own in the mainstream, which makes it different from IPO.

Also, the company can operate in the market with a private tag but not public since it doesn’t issue its shares to the general public.

Flexibility in amount is another contributing factor that makes Private Placement quite a lucrative option. Since investors can be family or friends, establishing the foundation of trust isn’t that difficult.

It offers a faster turnaround and requires less investment in comparison to the private placement. A private placement can be a less expensive alternative to fund small business capital needs.

Minimal documentation requirement is another notable benefit of Private placement.

Compare IPO & Private Placement – Drawbacks

Here are list of drawback of IPO & private Placement –

Cons of IPO

Even though you need extensive capital for your business, still your company will have to meet the eligibility criteria. Not every company can enter the stock market via IPO.

Some underlying rules and regulations set by SEBI must be followed to get qualified for IPOs. Also, the expense that a company incurs during the IPO process is another notable subject.

The expense can adversely impact the balance sheet of a new company with limited capital in the back.

In most instances, the company has to bear expenses for marketing campaigns to grab the attention of potential investors.

Another downside of IPO is that not every investor can park their money in IPO.

Cons of Private Placement

Apart from benefits, we may also get to see a few major downsides for the company on going with a Private Placement alternative.

For instance – issuing companies have to pay higher interest to the potential investors.

It happens because such companies have higher risk rates; they may have no assigned ratings that could specify their share value and performance.

Still, investors take a risk and make an investment on the condition that the company will pay the higher interest rate.

In most instances, finding investors becomes a difficult subject for companies as not so many people are willing to invest in a startup.

The company itself can be in its growth phase. Therefore the expectancy surges that investors may lose their entire investment.

IPO vs Private Placement – Conclusion

IPO and Private Placement both carry their own importance in the financial industry. Companies look after these superior alternatives to fund their capital needs.

Still, both methods satisfy the different capital requirements of the company. Private placement supports a company with low capital requirements and at present in its growth phase.

On the other hand, Initial Public Offering builds a way for a successful startup or a privately owned company to go public and pile up funds for its business operations.

That’s how both methods satisfy the different objectives of the respective companies.

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