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.

  1. PIPE Deal

    Signifying "Private Investment in Public Equity," a PIPE deal ...
  2. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  3. Fully Diluted Shares

    The total number of shares that would be outstanding if all possible ...
  4. Capital Stock

    The common and preferred stock a company is authorized to issue, ...
  5. Issued Shares

    The number of authorized shares that is sold to and held by the ...
  6. Common Stock

    A security that represents ownership in a corporation. Holders ...
Related Articles
  1. Investing

    Invest In This Solution To The Water Crisis

    We all know the constant struggle between the bulls and the bears on Wall Street. Some investors are always convinced that we sit on the edge of a cliff, that the enemies are always ready to ...
  2. Managing Wealth

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  3. Financial Advisor

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  4. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  5. Investing

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  6. Investing

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  7. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  8. Investing

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  9. Investing

    Don't Let Stock Prices Fool You

    Find out why a stock with a six-figure share price can still be a good value.
  1. Does homeowners insurance cover broken pipes?

    Learn how a typical home insurance policy excludes coverage for the broken pipe itself but covers the resulting accidental ... Read Answer >>
  2. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
  3. What is the difference between the equity market and the stock market?

    Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
  4. Why is an increase in capital stock on a company's balance sheet a bad sign for stockholders?

    Understand what capital stock represents for a company and understand the significance for investors when a company initiates ... Read Answer >>
  5. How can I tell if a utility will be able to pay off its debt?

    Take a deeper look at the use of debt financing within the utilities sector, and learn about some ways that investors can ... Read Answer >>
  6. Why is the value of capital stock important to public shareholders?

    Understand what capital stock is and how it's issued and authorized. Learn why the value of capital stock important to public ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center