PIPES

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.

Comments

[Daniel Nerezov]

Great topic, an interesting transaction worth studying.

Thanks for posting.

[Kevin]

That should be fun to try and push through the SEC, a 25% position.

[Jacoline Loewen]

I think PIPEs are going to become more common as the credit freeze continues.