PRIVATE PLACEMENT

PRIVATE PLACEMENT

Introduction

Private placement is money that investors put or save into companies in the form of stocks and bonds. In the United States, there is no need for private placement to be registered with the Securities Exchange Commission.

Private placements can be of significant value to the company owners and the private investors as well, provided that the value will be disclosed to the private investors. This may be also true for broad-based private placements. Company owners are pushing for increased disclosure of the cost of the private placements in general and the associated value they create for the private investors. Meanwhile, the private investors or the beneficiaries of the private placements remain in the light regarding the value and be able to discuss the value of the private placements respectively ( 2001).

It is true that the value can vary greatly based on the assumptions made but most private placements already include information about the private investor’s accrued benefit and his / her projected benefits at retirement.  Extending the calculations to include the cost or value of these private placement amounts would not be difficult. A simple reconciliation to the amount from the previous year would provide an idea of the value the private investor earned in the year. Any communication of the value of the private placement would need to have clear explanations of what the value represents and how the value will be sensitive to changes in assumptions and decisions that the private investor makes. But those explanations should be relatively easy to provide and it is in both the company owner’s and the private investor’s interest to better understand the value of the benefit.

Review of Related Literature

A. Securities Act of 1933

 

Private placement is the noticeable transactional exemption from Section 5 of the Securities Act of 1933, which mandates that companies need to submit a registration statement to the SEC before any transaction involving the selling of any security in interstate commerce happens.

The Securities Act of 1933 was established to oversee the private placement investments in companies and related matters, to protect private investors and to further the public interest in the preparation of informative, accurate and independent private placement benefits. The Act directs private companies to establish private placement standards, quality control standards and ethics standards to be used in the preparation and issuance of private placement reports as required by the Act. Under the Act, the duties of private companies involve registering private placement investments; establishing auditing, quality control and other standards relating to private placement audits, investigations and disciplinary proceedings of registered private placement companies and enforcing compliance with the Act (2005).

 

The foundation of the Securities Act of 1933 is freedom of contract or the standard of private placements. This denotes that when monitoring and following the appropriate legal private placement limits, private investors can take part in whatever contractual affairs they prefer. However, they must understand that the moment they have determined to do so, they are bind by the Securities Act of 1933. This principle has been used in the legal system for such a considerable amount of time by disputes on private placement transactions specifically, the use of stipulations that are not easily recognizable for one of the contracting parties have been contended with. However, recent decision in courts have presented that the true construction of the private placement contract should also be given precedence.

Freedom of contract frequently been marked dead on arrival as a principle for multifarious contemporary societies. That standard has been deemed indifferent to disparities in wealth, rank, place and authority that carry out the exercise of contractual choice an illusion for the frail and deprived. Within the legal context, it has been criticized as paying no attention to the great focus of wealth that misrepresent market procedures and that tramples down the rights of those involved ( 2003).

DISCUSSION

a) Identify any risks which may concern an investor/lender in relation to Hexcel Corporation

In principle, the private placement systems of Hexcel Corporation are simple as it is paid to those currently retired are financed by contributions from current private investors and firms and a stock of assets is accumulated from contributions which is used to finance private placements (2004). In practice of reward system, such schemes tend to be run by the state – for the very good reason that private investors would find it hard to enforce the intergenerational contract implicit in private placement ways as the Hexcel Corporation schemes also redistribute income to the less well off because the level of contributions paid by private investors that bears a closer relation to lifetime income than does the private placement benefits they receive.

The private investors in Hexcel Corporation within a full entitlement to a basic private placement benefit, may receive the same benefit and a full entitlement which is not dependent on the value of contributions paid over the working life but rather upon the number of years of investment (2004). In practice, the private placement schemes of Hexcel Corporation are run by the private sector and while there is often redistribution implicit in these schemes as the occupational private placement redistribution has more normally been from those who move jobs relatively frequently to those who stay put; private placement are defined contribution schemes where private placements are dependent on the value of the fund at retirement and there is no redistribution between private investors. This is because of institutional facts in Hexcel Corporation. Much of the discussion of the relative merits of the private placement schemes is about the relative efficiency of public against private sector provision of linkage between contributions and subsequent private placement payments of the private investors, as whether they are run by the public or private sectors by having payments out of funds accumulated by a person’s lifetime contributions having a fixed element and rising less than proportionately with fund value. 

Since Hexcel Corporation can be considered a steady company- where investor structure is assumed constant, as is the contribution rate into a balanced private placement scheme – the effective return on contributions made within private placement scheme is equal to the growth of the aggregate bill. It may seem strange to talk about a return on contributions to an unfunded scheme when contributions are paid out – the real value of the private placement investment paid to a private investor relative to the value of the contributions they made while working (2006). These private placement schemes in Hexcel Corporation can help private investors insure against shocks that affect particular generations and because such schemes often involve inter-generational transfers, they can help compensate for missing insurance markets for those who advocate a complete move to adopt private placement process within the redistributive and insurance roles to a varying extents as private placement schemes could be achieved by other means from universal schemes which provide the great part of retirement resources for the majority of private investors. If switching completely to private placement process is problematic because of transitional costs, and potentially undesirable because of missing markets and concerns about distribution, then where are we left with the problems facing these schemes stemming from private placements? The Hexcel Corporation management can switch to funding imposes costs while sticking with generous private placements which will generate big rises in contribution rates in associated labor market distortions. These will help in reducing company contribution rates for a given level of private placements. Private placements are just one element of the compensation package and must be balanced by Hexcel Corporation against the constant demands by private investors for improvements in benefits and term conditions.

Risks after the 9/11 bombings

The US government believes that the more they ‘promote’ private placements, the more private investors may suspect that there is something in it for management. Despite this, private investors tend to ask companies for advice on private placements and other financial matters. US companies therefore prefer to talk directly to private investors about private placements, rather than communicate in writing. There are no campaigns, again because some of the private investors might suspect an ulterior motive. If private investors are not interested in joining the private placement scheme, the company will ask them why. US companies have found that private investors do not drop out of the private placement scheme once they decide to join (2004).

US companies encourage private investors to join private placement schemes by likening not joining to missing out on pay. If private investors still do not join, the company follows up individually after four months. US companies recognize there are opinion formers in various departments, and it sees it as important to get these private investors on side on pensions. If a private investor refuses to join the private placement scheme in what seems a half hearted way, the company will get them a quote from the provider. US companies find that having their names on the quote gives private investors some confidence in the arrangement. The US government would advise other company owners that private placement provision is important. It feels it is part of the mix of things a company owner can do for its private investors. The company would encourage small and medium-sized enterprises to be less fearful of regulation and to use common sense. It is vital to be sincere when communicating with private investors, because building a good set of benefits will encourage private investors to join and to give their best and that, in doing so, it is making a contribution to the welfare of its private investors in the future. The US government likes to see even higher take-up rates and is looking at how this might be achieved (2005).

 

b) Which risks should concern Hexcel corporation management with the proposed private equity placement?

One of the big problems that investors at Hexcel Corporation face in private placements is that they are normally dealt with in a very administrative way. The challenge for Hexcel Corporation is to get their private investors interested in private placements as private investors are failing to understand the value of the company owners’ private placement provision and are not making informed decisions about their future and that the owners of Hexcel Corporation are frustrated too, because they feel that their private investors aren’t taking full advantage of what’s available for them. Research found that open defined private placements now outnumber final private placements and that many private investors don’t have a clear understanding of which private placement is the most suitable for their particular circumstances. Most private investors also have unrealistic expectations about the returns they will receive on retirement (1999). Moreover, Hexcel Corporation needs to close the communications gap if they want to avoid the problems and recriminations that could arise from private investors facing retirement with inadequate private placement returns as the private investors have to make informed decisions and places a lot of responsibility on the company owners. Companies that are successful are the ones that target separate groups of private investors and communicate with them effectively. Hexcel Corporation needs to do more to explain to private investors the benefits of having private placements because currently only half of the private investors joins a defined private placement scheme, where one is available as Hexcel Corporation should concentrate on to improve the way private placements are communicated that includes better targeting and developing clear objectives as many private investors don’t start thinking about private placement investments until it is too late most, when it comes to organizing and developing private placements.

Private placement reform at Hexcel Corporation must fit in with the social, economics and fiscal objectives of the government and must avoid major disruption to the economy. Indeed, it must strengthen the economy and the government must regard any change in the private placements system as a positive contribution for the well-being of the private investors and the well-being and the strength of the overall society. The total benefit package is the national income maintenance program. The four main types of national income maintenance programs are:

Ø  A high flat-rate benefit system and extensive private placement network

Ø  An earnings-related system with a limited private placement network

Ø  An earnings-related social security system with almost universal private placement system

Contributions and benefits for private placement purposes at Hexcel Corporation may apply to that portion of earnings above the social security ceiling. Typically, private placement schemes in Hexcel Corporation conform to the retirement age fixed under social security when the social security retirement age has been lowered or made flexible, private placement schemes have had to adapt. Private placement schemes of Hexcel Corporation and particularly national policies toward them also form a major part of their policy thinking (Labenski, 2006). The result is in effect, a national private placement layer that is supplementary to social security. Hexcel Corporation is not required to establish a private placement plan, though tax-incentive encouragement is given to those private investors not covered by a private placement plan to establish their own private placement program on an individual basis. The question arises then as to how to determine financial responsibility for private placement increases in a coordinated public-private system, when private placement schemes have not been equally geared to providing such increases and that there are pressures to revalue private placements have led Hexcel Corporation to limit private placement programs where possible.

Hexcel Corporation may not want to explain to its private investors how valuable their private placement benefit is, only to turn around and reduce or even eliminate it. Ironically, one of the first steps in many private placement redesigns in Hexcel Corporation is to explain to private investors what they currently have and what is changing. Therefore, often the private placement is explained to private investors just as it is changed ( 2005). Hexcel Corporation may be able to gain more appreciation of their private placement plans while they still have it in an ideal world, private investors may understand more of the reasons why the plan is being changed. Hexcel Corporation may have problems in their private placement schemes because of the unpredictable cost of keeping the scheme open. It was feared that costs could rise above the budget percentage, which was unsustainable for a company of its size. In place of the private placement scheme Hexcel Corporation may set up a private placement purchase plan as the decision could possibly take away the burden of conflicts for such a company as it was considerable.

Recommendations

Hexcel Corporation may have such debating ways of renovating the entire private placement system and this should lead to greater awareness of the benefits of planning for private placement investments. This means private investors will start putting far more emphasis on private placements when they choose a company to invest with.

Five-point private placement communication plan

Ø  Establish clear communication objective

Ø  Use simple, everyday language

Ø  Target and tailor communications for different groups

Ø  Create realistic expectations over contributions, investment growth and likely retirement age

Ø  Use interactive communication or case study examples

Private placements in Hexcel Corporation normally represent a significant component of a private investor’s benefits package. For example, in today’s economic environment of low long-term interest rates, the cost of providing an additional year of service in a private placement investment pays as much as the percentage of pay. Yet most private investors do not appreciate or understand the value of the private placement to them. Private investors who contribute to the cost of the private placement may be the exception, but even they are likely to focus on the cost to them today and underestimate the benefit they will receive in the future (2000). 

Inertia is always difficult to overcome. The fact that Hexcel Corporation has not communicated information about the value of private placements in the past can lead them to falsely conclude that they should not highlight the value of the private placements now. Ultimately, Hexcel Corporation must ask themselves if they are making an investment in the private placements plan, do they want private investors to understand the level of that investment. This is a valid concern.

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