What is a private placement investment?

Legal Floris LLC

Financial institutions assist investors by providing them with opportunities to gain returns on investment and accumulate wealth. Product offerings by banks, financial institutions and intermediaries are distinguished between third party offerings and own products. A further differentiation can be made between investment products that are publicly advertised and available to anyone, and private investment programs only available to a preselected clientele. A private placement investment program is the latter.

The term private placement investment is broad. It includes any investment offering not made to the public. As such, terminology is often misunderstood and abused. This brings the legitimate private placement investments into a bad daylight where it in general should not be. Investors must realize that investment products always contain risk and that risk mitigation strategies are costly and have an impact on the upside returns.

In general, risk is assumed by the supply chain. The closer to the source of the product, the better. Banks that issue their own private placement investments often need liquidity for special investments and enhancement of capital cushions. Such products have a subordinated position during insolvency, when defaults take place and failure of the financial institution is inevitable. Even though the placement agreement often does not define the usage of the invested funds, many of these programs are used to participate in high risk securities lending and financial REPO activities.

A private placement investment is in the undergrounds of the internet and in obscure environments combined with the High Yield Investment Program (HYIP). Such offerings require very detailed scrutiny and expert advice by registered financial and legal advisors to avoid being sucked into fairy tales of a daisy chain of brokers and other intermediaries.

Risk and return go hand in hand when it comes to investing. Hedging activities may protect against default but depend on the quality and stability of the underwriter. A good example of the failure of protection by an insurer was revealed during the global financial crisis where one of the largest global multinationals AIG was unable to cover the losses occurred by the insured matters. Before making any investment, investors must ensure they understand the mechanics of the investment program they are offered and only use assets they are comfortable with to place at risk. Investment risk involves upside returns and full depreciation.

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