What Is a Private Investment in Public Equity – PIPE?

Private investment in public equity (PIPE) is the buying of shares of publicly traded stock at a price below the current market value (CMV) per share. This buying method is a practice of investment firms, mutual funds, and other large, accredited investors. A traditional PIPE is one in which common or preferred stock is issued at a set price to the investor—a structured PIPE issue common or preferred shares of convertible debt.

The purpose of a PIPE is for the issuer of the stock to raise capital for the public company. This financing technique is more efficient than secondary offerings, due to fewer regulatory issues with the Securities and Exchange Commission (SEC).

Key Takeaways

  • Private investment in public equity (PIPE) occurs when an institutional or another type of accredited investor buy stock directly from a public company below market price.
  • Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds for them more quickly.
  • The discounted price of PIPE shares means less capital for the company, and their issuance effectively dilutes the current stockholders' stake.

How a Private Investment in Public Equity Works

A publicly-traded company may utilize a PIPE when securing funds for working capital, expansion, or acquisitions. The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange. Instead, these large investors purchase the company's stock in a private placement, and the issuer files a resale registration statement with the SEC.

The issuing business typically obtains its funding—that is, the investors' money for the shares—within two to three weeks, rather than waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.

Considerations for PIPE Buyers

PIPE investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the PIPE gets out. The discount also acts as compensation for a certain lack of liquidity in the shares. Since this offering was a PIPE, the buyers cannot sell their shares until the company files its resale registration statement with the SEC. However, an issuer generally cannot sell more than 20% of its outstanding stock at a discount without receiving prior approval from current shareholders.

A traditional PIPE agreement lets investors purchase common stock or preferred stock that is convertible to common shares at a predetermined price or exchange rate. If the business is merged with another or sold soon, 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 the greater risk of dilution in share values. For this reason, a structured PIPE transaction may need prior stockholder approval.

Advantages and Disadvantages of PIPEs

Private investment in public equity carries several advantages for issuers. Large amounts of shares are typically sold to knowledgeable investors long term, ensuring the company secures the funding it needs. PIPEs can be particularly advantageous for small- to medium-sized public companies that may have a hard time accessing more traditional forms of equity financing.

Because PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings, transactions proceed more efficiently with fewer administrative requirements.

However, on the downside, 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 new share issue dilutes the value of shareholders’ investments.

Short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price, potentially resulting in PIPE investors having majority ownership of the company. Setting a minimum share price below which no compensatory stock is issued can avoid this problem.

Pros
  • Fast source of capital funds

  • Less paperwork and filing requirements

  • Lower transactional costs

  • Discounted share prices (for investors)

Cons
  • Diluted share value (for current stockholders)

  • Buyers limited to accredited investors

  • Discounted share price (less capital for company)

  • Potential need for shareholder approval

Real World Example of a PIPE

In February 2018, Yum! Brands(YUM), the owner of Taco Bell and KFC, announced it was purchasing US$200 million of takeout company GrubHub stock through a PIPE. In this case, Yum! drove the PIPE to forge a stronger partnership between the two companies to increase sales at its restaurants through pickups and delivery. The added liquidity allowed GrubHub to grow its U.S. delivery network and to create a more seamless ordering experience for customers of both companies. GrubHub also expanded its board of directors from nine to 10, adding a representative from Yum!