About PIPEs PIPE Market PIPE positioning
About PIPEs
Private investment in public equity (PIPE), growing in significance and numbers, can benefit both the company seeking financing and the investor providing it.
An Attractive Alternative Niche
While most investors are familiar with the workings of publicly traded exchanges, only a handful are privy to the little known world of PIPEs.
A typical PIPE deal is one in which a publicly traded company exchanges discounted convertible debt or equity with a private investor for an infusion of cash into the company treasury.
Since the late 1990s, this corner of the capital markets has evolved into an important niche. Just over 1,000 PIPE transactions were recorded in 2009, raising a total of $38.5 billion for cash-hungry companies. This contrasts favorably to a mere 10 years ago, when 688 deals generated just over $10 billion in sought after capital.1
Directly Negotiated Transactions
In practice, PIPE deals generally involve an intermediary such as a private bank that facilitates negotiations between an issuer and prospective private investors. Rather than buy existing shares from other investors via an exchange, these private investors receive newly issued shares directly from the company’s treasury at a discount to the stock’s market price. Depending on the transaction, there may be other preferred terms.
Filling a Need
Generally speaking, the capital from a PIPE is necessary to execute a company’s business plan and to grow earnings. Companies often need access to more cash than is available through debt or traditional capital markets, and PIPEs offer an attractive alternative to these hard-to-structure sources of capital. In addition, PIPEs are more efficient in time and cost compared to more traditional forms of financing. For example, a public offering may take up to a year to finalize and the seven-figure price tag can be prohibitive.
Attractive Benefits
Benefits to PIPE investors include:
- Investor-friendly deal terms
- Potential profits even when stock prices do not appreciate
- A low correlation to equity and bond markets
Combined, these paint a compelling case for investors to consider adding PIPEs to their portfolios.
1 Source: PlacementTracker