Effect of private placements on capital market

ABDUL IMOYO

The belief that some companies would be quoted immediately after conducting private placements has created a lot of problems.

Wealth managers, asset managers and institutional fund investors are known to have used investment funds as diversified and flexible instruments to capitalise on the opportunities offered by financial markets.
In the past one year, the new issues have been brought to the capital market reflecting the dynamic development of the financial industry and stakeholders’ changing needs and goals. The Nigerian Stock Exchange (NSE) reports that there was increased recourse to the stock market by companies and governments in 2008, leading to increased activity in the primary market segment.

According to the NSE, the sum of N608 billion was raised through initial public offering (IPO) while a total of 21 new companies were listed during the year.
Some of the companies that were listed came to the NSE after a successful private placement of shares to select group of investors and transition from private limited company to public limited company (plc). The companies that were listed after privately placing their shares include Aso Savings and Loans plc, Omatek Ventures plc, Tantalizers plc, Fidson Healthcare plc and Chams plc. Others are FTN Cocoa Processors plc, Multiverse Resources plc and Mass Telecom Innovation Nigeria plc.

A private placement offering is the sale of stock of a company to private investors without the use of stock exchanges. Although the end result of a private placement offering is the same as a public sale of stock through the exchange markets (i.e. the sale of stock to the private investor), unlike a public offering, a private placement offering does not involve securities that are registered with the Securities & Exchange Commission (SEC).
Accordingly, there are certain restrictions on the sale of stock pursuant to a private placement offering that are not inherent in a public sale of securities. The most significant restrictions are the naira amount of stock that may be sold and the investors to whom such stock may be sold.

Ironically, while IPOs generated N608 billion in 2008, the sum of N700 billion was raised through about 320 private placements between October 2007 to and August 2008. As at the close of the year, more companies were still placing their shares even as capital market operators noted that a significant amount of these monies actually came from the secondary market.
Some of the companies that concluded their share placements in 2008 include Barcelos which sought N750 million by offering 300 million shares of 50 kobo each at N2.50 per share. Also, Arco Petroleum was in the market to source the sum of N3.125 billion by offering 1.250 billion shares of 50 kobo each at N2.50. Other placements during the period include Weco Systems’ N1.5 billion, and Shoreline Dredging and Oil Services which placed 700 million shares at N4.00 per share.

Confirming previous notions that the avalanche of private placements contributed to the stock market downturn, Ndi Okereke Onyiuke, the director general of the NSE said that private placements have done a lot of damage in the stock market; because they are not done the way they are supposed to be done.
Financial experts say that Private placement offerings will usually use a placement memorandum, which is a document very similar to a prospectus, which will be distributed to potential investors before the actual sale of securities.
The placement memorandum contains a large amount of information on the company proposing to sell its stock, such as the company’s history, its key employees, its financial statements, its primary products and/or services, its competitors and its marketing strategy. A private placement offering is very useful to small to mid-sized businesses seeking capital infusion since the expense incurred in a private placement offering is a fraction of that incurred in registering securities with the SEC to enable trading on the public stock exchanges. Furthermore, the requirements of a company that wishes to sell stock through a private placement offering are much less restrictive than a company wishing to offer securities on a public market (i.e. there are no minimum size requirements for a company selling stock through a private placement offering).

As noted above, the drawbacks of a private placement offering is that there are certain investor and naira amount restrictions. Also, due to the fact that no public market for the stock offered in a private placement offering exists, the investor pool may be smaller due to a potential investor’s perception that the stock may not be readily liquidated.
This Okereke-Onyiuke and other analysts believe is the bane of so many people that have invested their monies in private placements. According to her, some companies had actually taken money from investors by telling them that the shares would be listed on the NSE subsequently.

The belief that some companies would be quoted immediately after conducting private placements has created a lot of problems whereby so much money was chasing private placements because the Nigerian public thought they were buying shares that was quoted or would be on the stock exchange and can be sold at anytime they wanted to sell same. By the time they discovered their mistake and the stock exchange spoke about it, it was too late she said.
Although she confirmed that there were some good placements, it was gathered that some of the companies that have floated private placements had subsequently applied to the stock exchange and did not meet the listing requirements. The NSE boss noted that people’s funds are locked up since they cannot sell what they are holding because the shares are not publicly quoted.
Albert Okumagba, managing director of BGL plc had described the deluge of private placements as a positive development since most companies are likely to move to the official market afterwards.
However we have a situation whereby a large number of private placements are yet to be listed and as such the monies are yet to return to the secondary market, he stated.
He suggested that the NSE should endeavour to review its listing requirements and reduce costs considerably so as to attract all or most of the companies to become listed on the Exchange.
This, he said will assist in the achievement of the target of 1000 listed companies within the next 24 months.

Accordingly, NSE should allow companies to list by introduction at prices that the companies (issuers) and issuing houses/financial advisers professionally determine and allow market forces to accept or reject the price by their market actions, he said.
However, going by the continued market deceleration, the focus has since shifted from the effect of private placements on the market to other economic and fundamental issues. Operators have since discovered the need to collaborate and introduce measures that would stir confidence and boost market outlook in the current year.