Kirin Views 14 | Private placement: A misunderstood method to raise capital

Kirin Views is the second series of Kirin Capital towards the goal of “Know Vietnam, Long Vietnam”. This column provides Kirin’s observations and opinions on Vietnamese market through in-depth research driven by an expert team with decades of experience, assisting investors at home and abroad in better understanding the potential opportunities of Vietnam and join hands with “Know Vietnam, Long Vietnam”.


01 | The methods to mobilize capital of the listed companies

Phát hành riêng lẻ

Business development requires continuous support from capital. Before crowdfunding, many enterprises can use several methods to raise private equity capital. These methods are relatively flexible. After an IPO, information needs to be published and transparent to ensure the rights of retail investors. It is also subject to be managed by the State Securities Commission of Vietnam. So that capital mobilization becomes more cautious. Mainly, capital mobilization methods include:

  • Bank loan: Use company assets as collateral or the company’s reputation to carry out bank loan procedures.
  • Bond issuance: Issue bonds to several individuals or organizations to raise capital.
  • Issuing shares to the public: Raising capital through the issuance of shares to investors in the market.
  • Issuing private shares: Raising capital through issuing private shares to several specific individuals or organizations.

Of the 4 capital mobilization methods mentioned above, the first 3 methods are all relatively easy to receive public recognition. Only the 4th method is still causing a lot of controversy in the market.

What is a private placement?

A private placement is when a listed company issues shares to specific investors or organizations to raise capital.

The Private Placement unfair – Vietnamese investors’ prejudices private placements?

Currently, in Vietnam private placement market, there are generally several points of view:

  • The private placement is priced much lower than the trading price on the market, and the company’s growth potential hurts the interests of small and medium shareholders. 
  • The blocks of shares in the Private Placement are big, causing stock dilution for small and medium shareholders.
  • The private placement focuses on sharing stocks with the company’s leaders and large shareholders, not on small and medium shareholders. There are concerns about stock manipulation, and rights and benefits are not guaranteed between shareholders. 
  • The announcement time for the private placement is relatively short. In addition, the plan for placement is constantly changing, and it is impossible to ensure information transparency, accuracy, and timeliness.

02 | Why do these opinions exist in the market?

Firstly, Vietnam’s capital market is currently in its infancy and needs to be popularized; most investors are still first-generation investors and need more exposure to knowledge. investment knowledge;

Second, although Vietnam’s capital market laws and regulations have improved recently, comprehensive improvements are still needed for private equity offerings.

The third reason – that is also the most important thing:

  • The Vietnamese capital market, especially private placement, has been unusual in recent years.
  • Listed companies do not have strict pricing systems when implementing private issuance.
  • The leading issuers are major shareholders.

The plan to issue and use capital still needs to be implemented. The company has not taken full advantage of the capital from the private placement to develop and expand the business, causing the business value to decrease instead of increase, or the development of the business is worse than the proposed private placement plan, causing damage to the business and the interests of shareholders and increasing the adverse reaction of small and medium-sized shareholders to the private placement to a certain extent.

So, in retrospect, what was the primary purpose of the private placement?

Expanding capital scale: Listed companies need significant capital sources to extend or transform business activities. At this time, they can increase capital scale through private stock issuance.

  • Improve debt ratio: Listed companies can improve debt ratio through private share issuance, thereby reducing financial risk.
  • Increase the ownership ratio of institutional investors: Listed companies can increase the ownership ratio of institutional investors through private share issuance, improving corporate governance, and using an ecosystem of strategic partners to develop effective business operations.

As mentioned above, a private placement is a form of capital mobilization after the company is listed; the primary purpose is to raise capital to improve the company’s operations, optimize operating efficiency, and reduce costs—operating costs in all aspects to achieve sustainable development for the company.\

So how to eliminate cognitive biases in this field?

We think the following things need to be done:

  • Improve laws and regulations, especially in a private placement, standardize and improve corresponding information such as issuance price, issuance plan, shareholder participation conditions, and limited time transfer so that it is as open, fair, and objective as possible to all participants or parties involved.
  • Disseminating knowledge of investors. The Vietnam market size is still potential. Private placement is still an appropriate financing method, and communication about this method needs to be more widespread. Financial institutions, regulators and other capital market participants need to do more to impart knowledge to the market.
  • In supervising listed companies, management agencies need to be more cautious when approving private placement deals, carefully evaluate the details of the issuance plan to protect the interests of small and medium shareholders, and simultaneously meet the company’s capital needs for development. After issuance, supervise and monitor the enterprise’s use of capital to ensure that capital is used effectively, creating a good market environment.
  • Listed companies especially need to pay attention to the internal nature of the business and make honest and practical assessments based on their capital situation and project conditions to optimize the use of capital resources. Mobilize to create sustainable value and profits for corporate shareholders. At the same time, when mobilizing capital, it is necessary to consider protecting fair rights for all shareholders, including large, small and medium shareholders.

As long as all parties cooperate, we believe the development of Vietnam’s capital market will be stronger.