MBA Course Knowledge Center: Private Investment in Public Equity (PIPE)

Tuesday, April 17, 2012

Private Investment in Public Equity (PIPE)

Introduction

In general a PIPE is defined as a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the Securities and Exchange Commission (the “SEC”).

PIPE is “reinventing” of the relationship between the public and private capital markets. The normal relationship is private capital first and then public capital. But now an increasing number of public companies have turned to alternative forms of financing in which publicly traded companies access new capital through the sale of stock directly to a select group of private investors.

Over the past few years, the use of PIPEs has dramatically increased, with PIPE transactions in 1999, 2000 and 2001 totaling close to $50 billion.

Many major private equity funds have entered the PIPE market.

As the markets for PIPEs have improved, the public markets have learned to better interpret the financing vehicles and, as such, the universe of prospective investors has expanded.

In general, an investment by a traditional private equity fund has come to signal:

(i) an indication that the company has improved its financial posture;

(ii) that smart investors are buying into the Company’s plan; and

(iii) reinforcement that the company is undervalued at the current stock price level.

As a result of this interpretation, there is typically a favorable market reaction from the issuance of a PIPE. For example, in a study performed by CSFB of more than 100 PIPE investments made by traditional private equity funds, concluded:

Average premium to the prior’s day close was 11.7%,
Average premium to the trailing 15-day average was 10.4%,
Average 1-day stock price increase was 8.0%,
Average 30-day stock price increase was 12.2%

A business week article mentioned that, In recent weeks(October 2007), officials at Blackstone Group and the private equity arm of Goldman, Sachs & Co. (GS ) had said they see PIPEs as a lucrative opportunity. This statement sends the signal that PIPE is a significant alternative in private equity investment.

Investment Banks

Rodman & Renshaw Capital Group, Inc (NASDAQ: RODM), today announced that its Rodman & Renshaw, LLC subsidiary has maintained its leading position in PIPE transaction deal volume for the first half of 2008, garnering the top spot in PlacementTracker's First Half 2008 PIPE Market League Tables, published by Sagient Research Systems. During the first half of 2008 Rodman completed 25 transactions raising a total of $404 million. Rodman was the number one ranked PIPE advisor by deal volume for all of 2007 as well.

PlacementTracker is a flagship product of Sagient Research Systems and well recognized as the leading provider of research, data, and nalytics covering the PIPE market.