This morning I had a meeting with a listed company that wants us to take a 25% stake in their business. This type of transaction is known as a PIPE, a "private investment in public equity."
A PIPE is an alternative available to publicly traded companies that need to raise money but don't want to go through the complexity of selling shares through a secondary offering. Instead, the company finds an investor and sells him a block of newly issued shares at an agreed price or a block of debt which can later be converted into shares (a structured PIPE).
PIPE transactions often make more sense than secondary share market listings:
- Relatively small amounts of capital can be raised;
- The fund raising process should be much faster;
- Pricing is certain once the deal has been negotiated (none of the uncertainty of a book build);
- The transaction remains confidential until it's completed. Competitors don't get warning that you're raising capital;
- It should be a cheaper way to raise money. Investment bank fees are comparable with a secondary listing, particularly when you take into account the relatively small amounts which are often raised. However, a PIPE often results in less equity dilution than a secondary. To get a secondary away, it's normal to offer investors a discount off the traded share price of 10% or more. By contrast the PIPE discount is usually less than 5%.
If you're really keen, here's an entire book on PIPES or a terrific chapter from the book.
Great topic, an interesting transaction worth studying.
Thanks for posting.
Posted by: Daniel Nerezov | March 04, 2006 at 02:15 PM
That should be fun to try and push through the SEC, a 25% position.
Posted by: Kevin | May 12, 2007 at 02:18 AM
I think PIPEs are going to become more common as the credit freeze continues.
Posted by: Jacoline Loewen | February 03, 2009 at 04:58 AM