Private investment in public equity

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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. It is an allocation of shares in a public company not through a public offering in a stock exchange. PIPE deals are part of the primary market. 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.[ citation needed ] 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 in the US, 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. In a recent global study of PIPEs, analysing more than 10,000 PIPEs the world (PIPEs issued in 37 countries), firms raised $396 billion via PIPEs between 1995 and 2015, two thirds of which was raised by non-US firms. [2]

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 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. [3]

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. [4]

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 United States, 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.

See also

Related Research Articles

<span class="mw-page-title-main">Capital market</span> Financial market

A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators like Securities and Exchange Board of India (SEBI), Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect investors against fraud, among other duties.

<span class="mw-page-title-main">Leveraged buyout</span> Acquired control over a company by the purchase of its shares with borrowed money

A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. This is done at the risk of magnified cash flow losses should the acquisition perform poorly after the buyout.

An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded.

<span class="mw-page-title-main">Investment banking</span> Type of financial services company

Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services or research. Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket, Middle Market, and boutique market.

Private equity (PE) is capital stock in a private company that does not offer stock to the general public. In the field of finance, private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms, rather than the companies in which that they invest.

<span class="mw-page-title-main">Securities market</span> Component of the wider financial market

Security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Security markets encompasses stock markets, bond markets and derivatives markets where prices can be determined and participants both professional and non professional can meet.

A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it can be a non-dilutive pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering.

A reverse takeover (RTO), reverse merger, or reverse IPO 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. Sometimes, conversely, the public company is bought by the private company through an asset swap and share issue. The transaction typically requires reorganization of capitalization of the acquiring company.

Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders. This increase in the number of shares outstanding can result from a primary market offering, employees exercising stock options, or by issuance or conversion of convertible bonds, preferred shares or warrants into stock. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, and the value of individual shares.

A special-purpose acquisition company, also known as a "blank check company", is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making the private company public without going through the initial public offering process, which often carries significant procedural and regulatory burdens. According to the U.S. Securities and Exchange Commission (SEC), SPACs are created specifically to pool funds to finance a future merger or acquisition opportunity within a set timeframe; these opportunities usually have yet to be identified while raising funds.

A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies and technologies.

An alternative public offering (APO) is the combination of a reverse merger with a simultaneous private investment of public equity (PIPE). It allows companies an alternative to an initial public offering (IPO) as a means of going public while raising capital.

<span class="mw-page-title-main">History of private equity and venture capital</span>

The history of private equity, venture capital, and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, although interrelated tracks.

<span class="mw-page-title-main">Private equity in the 1990s</span>

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 interrelated tracks.

<span class="mw-page-title-main">Private equity in the 2000s</span>

Private equity in the 2000s represents one of the major growth 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 expanded along parallel and interrelated tracks.

Publicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.

<span class="mw-page-title-main">Stock</span> Shares into which ownership of the corporation is divided

Stocks consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the number of like shares each stockholder owns. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

<span class="mw-page-title-main">Paulson & Co.</span> American investment management firm

Paulson & Co., Inc. is a family office based in New York City. Previously, it was a hedge fund established by John Paulson in 1994. Specializing in "global mergers, event arbitrage, and credit strategies", the firm had a relatively low profile on Wall Street until its hugely successful bet against the subprime mortgage market in 2007. At one time the company had offices in London and Dublin.

<span class="mw-page-title-main">Securities market participants (United States)</span>

Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.

<span class="mw-page-title-main">American Capital</span> U.S. financial services firm

American Capital, Ltd. was a publicly traded private equity and global asset management firm, trading on NASDAQ under the symbol "ACAS" from 1997 to 2017 and a component of the S&P 500 Index from 2007 to 2009. American Capital was sold to Ares Management in 2017 at a sale price that totaled $4.1 billion. For those investors who bought American Capital stock in its August 29, 1997 IPO, and held their shares through the sale of American Capital on January 3, 2017, they received a 14% compounded annual return including dividends.

References

  1. ↑ PlacementTracker Publishes PIPE Market League Tables.
  2. ↑ Andriosopoulos, Dimitris; Panetsidou, Styliani (January 2021). "A global analysis of Private Investments in Public Equity". Journal of Corporate Finance. 69: 101832. doi:10.1016/j.jcorpfin.2020.101832. S2CID   234357942.
  3. ↑ Lerner, Leib M. (2003). "Disclosing Toxic PIPEs: Why the SEC Can and Should Expand the Reporting Requirements Surrounding Private Investments in Public Equities". The Business Lawyer. 58 (2): 655–688. JSTOR   40688136.
  4. ↑ SEC v. Langley Partners, L.P., et al., Civil Action No. 1:06CV00467 (JDB) (D.D.C.)

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