The Craze for Private Placements

A phenomenon is sweeping across the investment landscape in Nigeria. This phenomenon has been gathering storm in the last 2 years. This powerful wave is the Private Placement (PP) phenomenon.

PP’s have been with us for many years but were made more popular by the capital raising of banks in 2004 and 2005. My first investment in a PP was in 2004 when I bought the IBTC placement at N3.9 a share. I sold my holdings in late 2007 at N18+. Not bad but not spectacular compared to recent gains made by some investors in PPs.

It is the lure of these extraordinary gains that is attracting investors and promoters to PPs. Suddenly every company is doing a PP and investors are jumping to invest in any PP in sight.

The strong bull run of 2007 has encouraged many companies to issue PPs. This is because when the investing sentiment is bullish, investors are more willing to take on more risk at high prices. Private companies have latched onto this opportunity to sell a piece of their company at valuations that cannot be justified. The main desire of the promoters is to reward themselves by taking advantage of the general lack of sophistication of majority of investors in Nigeria.

In addition, an ugly trend that has reared its head is staff of issuing houses and placement agents requesting for a premium on the issue price. This is for a PP that has not even close. So they get to make money for nothing! This is fraudulent to say the least and I encourage readers to report such to management of the issuing house or placement agent. These guys need to be taught a lesson.

While investing in PPs could be very profitable, investors should be very careful in which PP they invest in. This is even more relevant with the recent habit of return money on PPs. There are several things an investor can do to safeguard his funds from investing in a very risky PP. These include:

1) Invest only in a reputable company with known products. Eg PP of BGL, Reltel etc. A PP issued by any of the above is surely genuine.

2) Look out for PP packaged by a reputable issuing house such as IBTC, FBN Capital, Afribank Capital and the like. These issuing houses will not get themselves involved in a fishy PP.

3) Do not invest in over priced PPs. To make a reasonable profit, the entry price must be reasonable. The valuations of some recent PPs have been unrealistic. It simply does not make sense to invest in a very risky PP that is over priced.

4) Diligently examine the audited accounts and the forecast. Make sure the fundamentals of the company are sound.

5) Invest only in PPs promoted by reputable business people who know the business.

By concentrating on only PPs that meet the above criteria, investors will be able to separate the wheat from the chaff. In doing so, an investor might discover a gem of a PP, a winner and will stay clear of very risky PP’s that could end up as losers.