Private investment in public equity

Private investment in public equity

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 investors. 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.

Contents

PIPE market

The attractiveness of PIPE transactions has waxed and waned since the late 1990s. For private equity 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.”[1] 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.[2]

PIPEs and mergers and acquisitions

Many reverse mergers 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., Australia, Canada, and the United Kingdom are accommodating for PIPE transactions, however in certain areas there are stated preferences for rights 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.

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

References

Further reading



Wikimedia Foundation. 2010.

Игры ⚽ Нужно сделать НИР?

Look at other dictionaries:

  • Private investment in public equity — Le Private investment in public equity (PIPE) est une augmentation de capital (actions, obligations...) réservée à certains fonds de capital investissement au lieu d un Appel public à l épargne. Ces opérations sont particulièrement appréciées des …   Wikipédia en Français

  • Private Investment in Public Equity - PIPE — A private investment firm s, mutual fund s or other qualified investors purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs traditional and… …   Investment dictionary

  • Private Investment in Public Equity — ( PIPE) Occurs when private investors take a sizable investment in publicly traded corporations. This usually occurs when equity valuations have fallen and the company is looking for new sources of capital. Bloomberg Financial Dictionary …   Financial and business terms

  • Public-Private Investment Program for Legacy Assets — On March 23, 2009, the United States Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the United States Treasury Department announced the Public Private Investment Program for Legacy Assets. The program is designed to… …   Wikipedia

  • Public-Private Investment Program - PPIP — A plan designed to value and remove troubled assets from the balance sheet of troubled financial institutions in the U.S. Essentially, the Public Private Investment Program s goal is to create partnerships with private investors to buy toxic… …   Investment dictionary

  • Private equity in the 21st century — relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub industries, leveraged buyouts and venture capital experienced growth along parallel although… …   Wikipedia

  • Private equity in the 1990s — relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub industries, leveraged buyouts and venture capital experienced growth along parallel although… …   Wikipedia

  • Private equity in the 1980s — relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub industries, leveraged buyouts and venture capital experienced growth along parallel although… …   Wikipedia

  • Private equity — In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. There is a wide array of types and styles of private equity and the term private equity has… …   Wikipedia

  • Equity co-investment — An equity co investment (or co investment) is a minority investment, made directly into an operating company, alongside a financial sponsor or other private equity investor, in a leveraged buyout, recapitalization or growth capital transaction.… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”