Private-to-Public Investing

Overview: A general rule in investing is that the earlier in the life of a company you invest, the greater the potential reward. Venture capitalists investing in embryonic companies receive far more equity for the cost than those who invest later on at the initial public offering stage (IPO). In return for this premium, however, venture capitalists incur far more risk, too, as it is difficult for them to exit their investments until these private companies are either purchased or taken public. One strategy for achieving private-stage, if not venture capital-style, premiums without the associated degree of risk is to invest in late-stage private offerings. An investment by way of a private security in a company can take many forms, but the primary vehicles are straight common stock and convertible preferred stock. Convertible preferred stock functions initially like a bond, paying interest, until the holder chooses to convert it to equity at a predetermined price. As investors incur more risk in private versus public offerings, they can sometimes negotiate with the issuing company to gain more attractive redemption rates, coupons, and accumulated interest, among other terms of the securities. Assessing competition is a key part of fundamental analysis, and this involves competition at various levels of the business: sales, replacement management (the possibility of losing and replacing your valuable senior management asset), merchandising and marketing, R&D, controls and information technology, and the product or service and its proprietary nature.

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Format: HTML | Date: Jan 2003 | Pages: 1