What is Private Placement Debt?

Private placement debt is a type of debt that is generated when a bond or some other type of security is sold in a non-public offering. The issuer of the security in general is effectively creating a debt, since the securities function as the means of raising money for the issuer. Over time, the issuer will pay interest to the investors who buy the stocks, bonds, or promissory notes that normally are offering in these private offering sessions.

There are several characteristics that are associated with private placement debt. Typically, this type of investment opportunity does not have to go through the same registration processes associated with securities that are sold via an initial public offering or on a traded in a public market. Trade regulations regarding the creation and sale of private placement debt instruments are normally regulated by national agencies. Since each nation develops its own process for qualifying who may offer stocks, bonds, or other types of notes for private placement, it is important to consult with investment professionals such as an investment banker before actually beginning to craft this type of offering

Private placement debt is also highly likely to attract institutional and high profile investors, such as insurance companies or pension funds. In some situations, other corporations may be invited to participate in a private placement offering. Often, the potential return associated with this type of investment is sufficient to make the debt worthwhile for these types of major investors. Depending on the nature of the private placement debt, the investment may generate a steady stream of income for the insurance company or pension fund, which in turn makes it possible for those entities to honor the membership interests associated with individuals associated with the fund or insurer.

While private placement debt may be short-term, this approach is often used as a means of securing financial assets that the issuer can pay off over the long-term. For example, a bond issue sold through private placement may generate funds that are used to build a new manufacturing complex. Over a period of 20 years, the issuer may provide investors with periodic interest payments, and finally settle the debt in full by repaying the principal once the maturity date arrives. In the interim, the manufacturing plant has become completely self-supporting, allowing the issuer to honor the debt obligation without the need to make use of other resources to settle the balance due to investors in the bond issue.