Private Investment in Public Equity - PIPE

What is a 'Private Investment in Public Equity - PIPE'

A private investment in public equity (PIPE) is a private investment firm's, a mutual fund's or another qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. A traditional PIPE is one in which common or preferred stock is issued at a set price to raise capital for the issuer, whereas a structured PIPE issues common or preferred shares of convertible debt. This financing technique is more efficient than secondary offerings, due to fewer regulatory issues with the SEC, and is great for small- to medium-sized public companies that may have a hard time accessing more traditional forms of equity financing.

BREAKING DOWN 'Private Investment in Public Equity - PIPE'

A publicly traded company may utilize a PIPE when securing funds for working capital, expansion or acquisitions. The business typically obtains funding within two to three weeks, rather than waiting several months or longer, as with a secondary stock offering.

Types of PIPE Transactions

In a standard PIPE agreement, investors purchase stock in a private placement. Registration of the new shares with the SEC typically becomes effective within a month of filing. PIPE investors may purchase stock below the market price as a hedge of protection against the price going down.

A traditional PIPE agreement lets investors purchase common stock or preferred stock that is convertible to common shares at a predetermined price. If the business is merged with another or sold in the near future, investors may be able to receive dividends or other payoffs. 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 greater risk of dilution in share values. For this reason, a structured PIPE transaction may need stockholder approval.

Advantages and Disadvantages of PIPEs

Large amounts of shares are typically sold to knowledgeable investors long term, ensuring the company secures the funding it needs. Because PIPE shares do not need registration with the SEC, transactions are handled more efficiently with fewer administrative requirements than secondary offerings.

However, 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 dilutes the value of shareholders’ investments. Short sellers may take advantage by repeatedly selling their shares and lowering the share price, potentially resulting in PIPE investors having majority ownership of the company. This situation may be avoided by setting a minimum share price below which no compensatory stock is issued.

Example of a PIPE

In May 2014, Platform Specialty Products Corporation completed a $300 million PIPE. An additional 15.8 million shares of common stock were issued at $19.00 per share. The proceeds were used for general company purposes.