An Overview Of Private Investment In Public Equity

An Overview Of Private Investment In Public Equity

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An Overview of Private Investment in Public Equity

Private investment in public equities (PIPE) is one of the most attractive markets for qualified individual investors and accredited institutional funds. Since the late 1990s, PIPE transactions have been increasing dramatically, raising $105 billion in equity capital over the past two years. In 2010, there were a total of 1,203 PIPE deals. Top Wall Street executives are increasingly becoming involved in PIPE transactions as placement agents. For investors, PIPEs have become attractive due to the restrictive regulatory challenges in executing control investments like private equity or venture capital. Since PIPEs do not involve public underwritten offerings, their relative time and cost efficiency make it attractive to public companies. PIPE transactions provided quick capital to the companies during the credit crisis in September 2008, when the companies could not access equity markets.

A PIPE deal is a directly negotiated transaction between an accredited investor and an issuer, a public listed company. PIPEs are tapped by small to medium-sized companies in industries that need frequent funding and mature companies that seek growth capital. Small to medium-sized companies find it expensive to procure funding from traditional equity financing and PIPEs provide a quick and easy solution to their capital requirements. Mature companies that generate revenue and operating profits but not sufficient cash for expansion, restructuring or acquisition operations rely on PIPEs to provide the necessary growth capital.

In a PIPE deal, the issuer offers a stake in the company to the investor in return for capital. The stake can be in the form of common or preferred stock, convertible bonds, or warrants, newly issued from the company’s treasury directly. It is sold to the investor at a discount to its current market price. The members in a PIPE deal include an issuer, an investor and a private placement agent. The placement agent acts as an intermediary between the issuer and the investor.

A PIPE deal falls into two main categories - traditional and structured. A traditional PIPE transaction deals with the issue of common or preferred stock at a discount to its current price. Since stockholder approval is required for sales of 20% or more of issuer’s common outstanding stock, most deals are structured within the limit. A structured PIPE deal is one in which convertible preferred stock or debt is issued at or above its current market price. Since stockholder approval is not necessary for a structured PIPE, issuers structure it without any restrictions on the sale quantity. Subsequent to the deal, the issuer commits to register the equity securities with the SEC for resale by the investor within a short time period following the investment.

PIPE investors include passive, but sophisticated equity market investors - individual and institutional. Hedge funds and private equity funds invest in PIPEs. Institutional investors include venture capital firms, major financial services firms, private money management firms and family groups. Individual investors comprise high net-worth individuals. PIPE investors with a short-term horizon focus on the liquidity of the company stock while long-term investors rely on due diligence and research on the company’s operations and future prospects.

PIPE investments benefit investors in the following manner:

1.Pricing discounts: Discounts to the current market price of the company stock, ranging from five to twenty-five percent, are provided to the investor. The discounts reflect the liquidity of the stock; that is, the higher the discount, the more illiquid the stock. On the contrary, convertible securities are priced closer to the market price owing to their underlying nature of convertibility to stocks.
2.Liquidity: Once the resale registration with SEC is approved, investors can sell the securities in the capital markets. The investors can insist on penalty provisions that require the company to make payments if resale registration is not effective within a prescribed time limit.
3.Transaction speed: PIPE deals are closed in T+3 days as the deal structure generally does not require stockholders’ and other third-party approvals. Since the issuer is a public company with information available publicly, due diligence too gets expedited.
4.Creative structure: Investors and issuers can work out creative PIPE deal structures with the aid of private placement agents for mutual benefit.

Risks of PIPE investments:

1.Control: PIPE investors are passive. Unlike other stockholders of the company, they do not control the board, corporate decisions or the liquidity events of the company.
2.Liquidity: Generally, PIPE investments offer short-term liquidity as part of its resale registration process. However, in certain PIPE investments, the company requires the investor to limit resale of securities to a specific period of time.

PIPE investments differ from other forms of investments namely private equity or venture capital in the above-mentioned liquidity and control dynamics of the transactions. PIPEs are a unique investment avenue providing investors with many advantages. As the PIPE market grows, investors can avail the increasing opportunities to invest in a broad range of companies. PIPEs are great investment vehicles assuring liquidity and returns for long-term investors.

By Eric Rice
http://www.lonewolfmedia.net

About the Author:
Eric Rice is the creator of Lone Wolf Inc and a main thought leader in social media monetization practices.  His experience and creativity in the social media space is utilized daily to design innovative content, delivery, and targeting.  Eric has built 3 other companies on the premise of social media marketing with his own money and has been designing and implementing successful campaigns for more than 3 years.



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