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PIPE Deal

What Is a PIPE Deal?

Private investment in public equity deal (PIPE Deal) refers to the practice of private investors buying a publicly-traded stock at a price below the current price available to the public. Mutual funds and other large institutional investors can strike deals to buy large chunks of stock at a preferred price.

PIPE deals are often offered by companies looking to raise a large amount of capital quickly.

Key Takeaways

  • Private investment in public equity deals (PIPE) is when a private investor, like a mutual fund or large institution, buys a chunk of shares at a below-market price.
  • PIPE deals are a way for companies to raise a large amount of money quickly.
  • They can be unpopular with existing shareholders because they dilute the existing pool of shares and reduce its value.
  • PIPE deals have similarities to some of the massive government bailouts seen in recent years, but they typically involve smaller, less systemically important companies.

Understanding PIPE Deals

In a traditional PIPE deal, a company will privately sell equity in publicly traded common or preferred shares at a discounted rate relative to the market price to an accredited investor. In a structured PIPE deal, the issuing company issues convertible debt, which can usually be converted to the issuing company’s stock at the purchaser’s will.

Usually, the offering company is trying to raise capital, either because they need it quickly or because they could not acquire it through other means. The purchasing company (usually a mutual fund or hedge fund) has the advantage of buying at a discounted price; because these directly sold shares are relatively illiquid, the purchaser is only interested if it can get the shares at a discount.

PIPE deals are popular because of their efficiency—especially compared to other kinds of secondary offerings—and because they are subject to fewer regulations from the Securities and Exchange Commission (SEC). Any publicly-traded company can initiate a PIPE deal with an accredited investor. This is especially useful for smaller or lesser-known companies that might have trouble raising capital otherwise.

History of PIPE Deals

Interest in PIPE deals has varied over time. In 2017, a total of $45.3 billion was raised over 1,461 deals. In 2016, 1,199 deals raised $51.6 billion. However, that is less than the $88.3 billion closed over 980 transactions in the first 9 months of 2008. PIPE deals tend to occur in markets or industries for which it is difficult to raise capital; thus, PIPE deals were popular at the height of the 2008 banking crisis.

PIPE deals are somewhat less popular with shareholders, as the issuance of new stock for these sales dilutes the value of existing shares. In some instances, investors or companies with inside knowledge of the trade have shorted the issuing firm stock in anticipation. Some regulators have called for more intensive regulations to prevent such insider trading opportunities, arguing additionally that the generally small offering firms have little choice but to take bad deals with hedge funds to raise sorely needed capital.

Special Considerations

PIPE Deals and Government Bailouts

PIPE deals can be akin to the kind of deals that occur with government bailouts of distressed companies or industries. In these deals the government purchases a chunk of equity in the form of stock, warrants, or convertible debt in return for the liquid capital a company needs to remain in operation, restructure, or avoid bankruptcy. A PIPE deals likewise often involve distressed companies that have run out of other options on the market to raise needed capital quickly, trading a chunk of equity to an institutional investor at a discount which can leave the buyer in a powerful position to influence the company or even a controlling interest.

An example of a similar government bailout deal would be the auto industry bailout of 2009, where the Treasury took over GM and Chrysler. These types of bailouts are generally more extreme than the typical PIPE deal, since the companies that seek them are more desperate and may have already tried and failed to negotiate a PIPE deal with a private institution. Private PIPE deals are also more likely to be pursued as a last resort by smaller companies who are not considered systemically important enough to warrant government action.

A private investment in public equity deal (PIPE Deal) refers to the practice of private investors buying publicly traded stock at a price below the current price available to the public.

Private Investment in Public Equity (PIPE)

What Is a Private Investment in Public Equity (PIPE)?

Private investment in public equity (PIPE) is the buying of shares of publicly traded stock at a price below the current market value (CMV) per share. This buying method is a practice of investment firms, mutual funds, and other large, accredited investors. A traditional PIPE is one in which common or preferred stock is issued at a set price to the investor, while a structured PIPE issues common or preferred shares of convertible debt.

The purpose of a PIPE is for the issuer of the stock to raise capital for the public company. This financing technique is more efficient than secondary offerings due to fewer regulatory issues with the Securities and Exchange Commission (SEC).

Key Takeaways

  • Private investment in public equity (PIPE) is when an institutional or an accredited investor buys stock directly from a public company below market price.
  • Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds more quickly.
  • The discounted price of PIPE shares means less capital for the company, and their issuance effectively dilutes the current stockholders’ stake.

How a Private Investment in Public Equity Works

A publicly-traded company may utilize a PIPE when securing funds for working capital to fund day-to-day operations, expansion, or acquisitions. The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange.

Instead, these large investors purchase the company’s stock in a private placement, and the issuer files a resale registration statement with the SEC.

The issuing business typically obtains its funding—that is, the investors’ money for the shares—within two to three weeks, rather than waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.

Special Considerations for PIPE Buyers

PIPE investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the PIPE gets out. The discount also acts as compensation for a certain lack of liquidity in the shares, meaning there can be delays in selling or converting the shares to cash.

Since this offering was a PIPE, the buyers cannot sell their shares until the company files its resale registration statement with the SEC. However, an issuer generally cannot sell more than 20% of its outstanding stock at a discount without receiving prior approval from current shareholders.

A traditional PIPE agreement lets investors purchase common stock or preferred stock that is convertible to common shares at a predetermined price or exchange rate. If the business is merged with another or sold soon, investors may be able to receive dividends or other payoffs. Dividends are cash or stock payments from companies to their shareholders or investors. Because of these benefits, traditional PIPEs are typically priced at or near the stock’s market value.

With a structured PIPE, preferred stock or debt securities convertible to common stock are sold. If the securities contain a reset clause, new investors are shielded from downside risks, but existing stockholders are exposed to the greater risk of dilution in share values. For this reason, a structured PIPE transaction may need prior stockholder approval.

Advantages and Disadvantages of PIPEs

Private investment in public equity carries several advantages for issuers. Large amounts of shares are typically sold to knowledgeable investors over the long term, ensuring the company secures the funding it needs. PIPEs can be particularly advantageous for small-to-medium-sized public companies that may have a hard time accessing more traditional forms of equity financing.

Because PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings, transactions proceed more efficiently with fewer administrative requirements.

However, on the downside, investors may sell their stock in a short amount of time, driving down the market price. If the market price drops below a set threshold, the company may have to issue additional stock at a significantly reduced price. This new share issue dilutes the value of shareholders’ investments, which can lead to a lower stock price.

Short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price, potentially resulting in PIPE investors having majority ownership of the company. Setting a minimum share price below which no compensatory stock is issued can avoid this problem.

Fast source of capital funds

Less paperwork and filing requirements

Lower transactional costs

Discounted share prices (for investors)

Diluted share value (for current stockholders)

Buyers limited to accredited investors

Discounted share price (less capital for company)

Potential need for shareholder approval

Real-World Example of a PIPE

In February 2018, Yum! Brands(YUM), the owner of Taco Bell and KFC, announced it was purchasing $200 million of takeout company GrubHub’s stock through a PIPE. In this case, Yum! drove the PIPE to forge a stronger partnership between the two companies to increase sales at its restaurants through pickups and delivery.

A private investment in public equity (PIPE) occurs when an institutional or other type of accredited investor buys stock directly from a public company below market price, instead of on a stock exchange. ]]>