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Why More Companies Are Turning to Private Capital Markets | Unpacked | J.P. Morgan Insights - YouTube
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SPEAKER: When a company decides
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to go public, it often makes
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headlines.
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But recently, more privately
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owned, fast growing,
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typically tech enabled
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businesses are turning
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to private capital markets,
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or PCM, to raise capital
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in order to keep growing.
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Take a look at this graph which
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shows the exponential growth
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in PCM over the past 10 years.
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What is PCM?
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And why has this strategy become
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so popular?
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Simply put, private placements
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are a way for a private company
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to raise capital from investors
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without having to go public.
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It's becoming more common
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with businesses that are scaling
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fast, both small and global.
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Let's say your family invests
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in your e-commerce startup
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in exchange
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for a small stake
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in the business.
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That's a PCM transaction.
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Within investment banking,
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think of PCM as another product,
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just like mergers
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and acquisitions.
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Here's how it works.
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Your e-commerce business
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is becoming popular and growing
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fast.
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You open pop-up shops
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around the country.
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You have a loyal customer base,
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and you want to expand, move
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into a new region,
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control the supply chain,
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and even sell your shoes
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in national department stores.
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But to make all this happen,
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you need more capital.
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Going
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through an initial public
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offering isn't an option right
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now, because you would prefer
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to stay private
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for another few years.
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This way, you can spend more
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time growing your business
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without the same level
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of scrutiny
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a public company receives.
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It could also mean more value
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for early investors.
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So it's been catching on.
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In 2020, there were more
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than two times the investments
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in the private market
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than the public market.
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Although the technology
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and health care sectors
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represent about 2/3
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of companies that are funded
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in the private market,
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PCM is an option
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for any industry.
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It's also an option
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for companies of all sizes,
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whether small or global.
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The strategy has become popular
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for a few reasons.
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First, there is a lot more
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capital available.
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Historically,
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large private investments
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in new companies mostly took
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place through venture capital
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firms, which primarily focused
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on startups and small businesses
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with long term potential.
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Secondly, a number
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of top internet companies
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were able to successfully scale
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their business
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in the private domain
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before going public.
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Today, there are many more types
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of private investors,
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like family offices,
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private equity firms,
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mutual funds, hedge funds,
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sovereign wealth funds,
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and pension funds.
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This means there is an abundance
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of capital
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now accessible to fast growing
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companies.
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From a private investor's
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perspective, the earlier they
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can own equity in a company,
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the more capital appreciation
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or value their share could earn.
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This will hopefully pay off when
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the private company goes
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public one day.
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But back to your business.
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Many companies will work
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with an investment bank
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to tap into a global network
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of private investors.
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Depending on the amount a client
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needs, it could require
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a few rounds of funding
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and more than one investor.
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While you focus on the business,
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the team will reach out
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to private investors who could
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potentially be a good match.
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They'll share your success
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to date, your vision,
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where you want to go,
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and your innovative customer
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service plans.
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Some important factors that make
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a good match include, does
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your idea resonate?
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Is your business model
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future proof?
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If you plan to take your company
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public one day, does your time
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frame align with an investor's?
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Interested investors will
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perform their own due diligence.
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Things like visiting
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your offices to get a feel
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for how things run day to day,
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conversations with company
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leadership,
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and a closer
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look at your financials
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and contracts.
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Interested investors will submit
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their terms, and the PCM team
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will help to evaluate
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the proposals.
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After that, legal, accounting,
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and other teams get more
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involved to complete
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the transaction.
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PCM has seen
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an incredible amount of momentum
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and it's expected to continue.
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What will the next 10 years
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bring?
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