Investment banks are not confined solely to working with and making money on large, publicly traded companies. They also can be hired by private firms. A private firm might hire an investment bank for help with a merger or acquisition or for issuing an IPO (initial public offering of shares). A private firm might also hire an investment bank as a placement agent.
Suppose a firm does not want to be acquired and cannot (or does not want to get) good loans from banks. They still need to raise capital, but can't access public markets, such as the stock market; they have to find different ways to raise capital. They hire a placement agent to act as an intermediary between them and investors. This allows them not only to connect with investors, but also allows them to focus on management, instead of finding investors.
Capital financing for private companies can come from a number of sources. Three of the main capital sources are:
- Equity financing: Private firms can sell some or all of their equity to investors. This is akin to selling off a portion of the ownership of the company. It may seem undesirable to sell a portion of the company's ownership, but many firms (especially start-ups and growth companies) need to do so for immediate capital to fund future growth .
- Mezzanine capital: A subordinated debt or preferred equity instrument that represents a claim on a company's assets, which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
- Specialist financing: This could include things such as government loans or special grants that the company qualifies for.
Placement agents are most often compensated through fee arrangements based on the amount of money raised and supported by the fund or company they are representing.