This article is about private investments in public equity or PIPEs. For investments in private equity through publicly traded vehicles, seepublicly traded private equity.
Aprivate investment in public equity, often called aPIPE deal, involves the selling of publicly tradedcommon sharesor some form ofpreferred stockor convertible security to privateinvestors. It is anallocationof shares in apublic companynot through apublic offeringin a stock exchange. PIPE deals are part of theprimary market. In the U.S., a PIPEofferingmay be registered with theSecurities and Exchange Commissionon aregistration statementor may be completed as an unregisteredprivate placement.
The attractiveness of PIPE transactions has waxed and waned since the late 1990s. Forprivate equityinvestors, PIPEs tend to become increasingly attractive in markets where control investments are harder to execute. Generally, companies are forced to pursue PIPEs when capital markets are unwilling to provide financing and traditional equity market alternatives do not exist for that particular issuer.
According to market research in the US, 980 transactions have closed totaling $88.3 billion in gross proceeds during the nine months ended September 30, 2008, putting the market on pace for yet another record year.1This compares with 1,106 such deals in 2000, raising $24.3 billion and 1,301 PIPE deals in the U.S. raising a total of $20 billion in 2005. In recent years, topWall Streetinvestment banks have become increasingly involved in the PIPE market as placement agents.
Through the acceleration of thecredit crisisin September 2008, PIPE transactions provided quick access tocapitalat a reasonabletransaction costfor companies that might otherwise have been unable to access the public equity markets. Recently, many hedge funds have turned away from investing into restricted illiquid investments. Some investors, includingWarren Buffettfound PIPEs attractive because they could purchase shares or equity-linked securities at a discount to the public market price and because it had provided an investor the opportunity to acquire a sizable position at a fixed or variable price rather than pushing the price of a stock higher through its own open market purchases.
Existing investors tend to have mixed reactions to PIPE offerings as the PIPE is often highly dilutive and destructive to the existing shareholder base. Depending upon the terms of the transaction, a PIPE may dilute existing shareholders equity ownership, particularly if the seller has agreed to provide the investors with downside protections against market price declines (a death spiral), which can lead to issuance of more shares to the PIPE investors for no more money.2
The SEC has pursued certain PIPE investments (primarily involving hedge-funds) as violating U.S. federal securities laws. The controversy has largely involved hedge funds that use PIPE securities to cover shares that the fund shorted in anticipation of the PIPE offering. In these instances, the SEC has shown that the fund knew about the upcoming offering (in which it would be involved) prior to shorting shares.3
Manyreverse mergersare accompanied by a simultaneous PIPE transaction, which is typically undertaken by smallerpublic companies. Shares are sold at a slight discount to the public market price, and the company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser.
The regulatory environment in certain countries, including the United States, Australia, Canada, and the United Kingdom are accommodating for PIPE transactions, however in certain areas there are stated preferences forrights issues, which allow existing shareholders an opportunity to invest before the company seeks outside capital. In these jurisdictions, once a company has completed a rights offering, it may pursue a PIPE transaction.
While current regulations permit PIPE transactions, it is widely perceivedcitation neededthat such transactions are an option of last resort for failing firms and a means by which unscrupulous investors may profit at the expense of common stockholders.
PlacementTracker Publishes PIPE Market League Tables.
Lerner, Leib M. (2003). Disclosing Toxic PIPEs: Why the SEC Can and Should Expand the Reporting Requirements Surrounding Private Investments in Public Equities.
SEC v. Langley Partners, L.P., et al., Civil Action No. 1:06CV00467 (JDB) (D.D.C.)
Norris, Floyd.A Troubling Finance Tool for Companies in TroubleNew York Times, March 15, 2006
Atlas, Riva D.When Private Mixes With Public; A Financing Technique Grows More Popular and Also Raises ConcernsNew York Times, June 5, 2004
GRETCHEN MORGENSON and JENNY ANDERSONSecrets in the PipelineNew York Times, August 13, 2006
PIPEs: A Guide to Private Investments in Public Equity
Majoros, Jr., George L. (2001), The Development of PIPEs in Todays Private Equity Market,
Lerner, Leib M. (February 2003), Disclosing Toxic PIPEs: Why the SEC Can and Should Expand the Reporting Requirements Surrounding Private Investments in Public Equities,
Morgenson, Gretchen; Jenny Anderson (2006-08-13),Secrets in the Pipeline,
History of private equity and venture capital
Articles with unsourced statements from December 2016
This page was last edited on 6 December 2018, at 04:55