Private Placement Debt Investments

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Private Placement Debt Investments

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Jason Rothenberg, CFA
NOV 30, 2020

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Private Placement Debt

Before there was a public bond market or a Securities and Exchange Commission, the private placement market was actively providing capital to borrowers. Initial issuers were railroads, mining and canal companies – deals that might be considered Infrastructure financings today. After the market crash of 1929, and the resultant financial market reforms, the Securities Act of 1933 (“Act”) was created requiring public bonds to be registered in order to sell such securities to the general public. Private bonds continue to be exempt from registration provided that they meet certain exemptions under the Act. Private placements remain an important source of funding for corporations today and are in strong demand from issuers and investors alike.

Dating back over 100 years, the private placement market provides investors with credit and geographic diversification, good asset-liability matching via strong call protection and compelling economics through enhanced yield, lower losses and potential for incremental income due to financial covenants.

Underwriting, negotiating, documenting and monitoring these investments is labor intensive. Extensive and deep relationships with investment bankers, issuers and deal sponsors is the key to sourcing transactions and building a diversified and well-structured portfolio with attractive yields. While some firms have built in-house expertise in this asset class, others have elected to outsource such investments to asset managers due to the substantial time and resources needed to participate in private placements.