Private investment in public equity
Encyclopedia
A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares
or some form of preferred stock
or convertible security to private investor
s. In the U.S. a PIPE offering
may be registered with the Securities and Exchange Commission on a Registration Statement or may be completed as an unregistered private placement
.
investors, 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, 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.” This 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, top Wall Street
investment banks have become increasingly involved in the PIPE market as placement agents.
Through the acceleration of the credit crisis in September 2008, PIPE transactions provided quick access to capital
at a reasonable transaction cost for 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, including Warren Buffett
found 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 toxic 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.
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.
are accompanied by a simultaneous PIPE transaction, which is typically undertaken by smaller public 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.
, Canada
, and the United Kingdom
are accommodating for PIPE transactions, however in certain areas there are stated preferences for rights issue
s, 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.
Though legal regulations are "accommodating" to PIPE transactions (i.e., legal), it is widely perceived that 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.
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
or some form of preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
or convertible security to private investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s. In the U.S. a PIPE offering
Securities offering
A securities offering is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose....
may be registered with the Securities and Exchange Commission on a Registration Statement or may be completed as an unregistered private placement
Private placement
Private placement is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors...
.
PIPE market
The attractiveness of PIPE transactions has waxed and waned since the late 1990s. For private equityPrivate equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
investors, 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, 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.” This 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, top Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
investment banks have become increasingly involved in the PIPE market as placement agents.
Through the acceleration of the credit crisis in September 2008, PIPE transactions provided quick access to capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
at a reasonable transaction cost for 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, including Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
found 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 toxic 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.
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.
PIPEs and mergers and acquisitions
Many reverse mergersReverse takeover
A reverse takeover or reverse merger is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public...
are accompanied by a simultaneous PIPE transaction, which is typically undertaken by smaller public 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.
Regulation
The regulatory environment in certain countries, including the U.S., AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
are accommodating for PIPE transactions, however in certain areas there are stated preferences for rights issue
Rights issue
A rights issue is an issue of additional shares by a company to raise capital under a seasoned equity offering. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from...
s, 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.
Though legal regulations are "accommodating" to PIPE transactions (i.e., legal), it is widely perceived that 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.
See also
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- Strategic Block InvestingStrategic Block InvestingStrategic block investing is a hybrid investment strategy generally used by fund managers who aim to play a constructive, active role in unlocking value from public companies through the implementation of financial, operational and governance initiatives from both minority and control positions...
- Alternative Public OfferingAlternative Public OfferingAn alternative public offering is the combination of a reverse merger with a simultaneous private investment of public equity . It allows companies an alternative to an initial public offering as a means of going public while raising capital.-Overview:There are two parts that comprise an APO:...
- Initial public offeringInitial public offeringAn initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
- StockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
- Preferred stockPreferred stockPreferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
- Public offering without listingPublic offering without listingA public offering without listing, often called a POWL deal or a POWL, is a form of public equity offering by non-Japanese firms in the Japanese market, without the previously required simultaneous listing on a local exchange A public offering without listing, often called a POWL deal or a POWL, is...