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.