Private Investment in Public Equity (PIPE) Definition
In a company, PIPE is said to be the stock purchase of a private investment firm, some other qualified investor or a mutual fund at a discount to the CMV / share (Current Market Value). Its objective is to increase equity. It basically stands for Private Investment in Public Equity.
The issue of preferred or common stock at a fixed price is called a traditional PIPE. Its purpose is to increase the equity for the issuer. On the other hand, the issue of preferred or common stock of the convertible loan is known as a structured PIPE. This financing method is more effective as compared to the secondary offerings. This is because of some regulatory problems with the SEC (Security & Exchange Commission). It is best for small as well as medium scale firms which may be facing a hard time approaching more traditional types of capital financing.
A Little More on What is Private Investment in Public Equity
A firm which trades publicly is able to use PIPE while securing acquisitions, financing resources for working equity and expansion. The business generally gets funds in 2 to 3 weeks instead of waiting for a month or even longer, same as with a stock oblation on less priority.
First, the investors sign a standard PIPE contract. Then, they buy shares in a private emplacement. The registration of new stock with the Securities & Exchange Commission generally completes within a filing month. PIPE traders can buy shares less than the market price being a safety hedge for the decreasing price.
A traditional ‘Private Investment in Public Equity’ contract allows the traders to buy common shares or preferred shares which can be converted to common stock at a price set in advance. In case of the merger or sale of 2 businesses in the upcoming days, the traders can get dividends or payments alike. Due to these advantages, the price of traditional PIPEs is normally equal to or round about the market value of the stock.
The loan securities or preferred stock which can be converted to common shares is sold with the structured PIPE. In case, the certificates consist of a reset clause, new stockholders are protected from negative risks. But the existing investors face a higher diluted risk in the value of shares. This is because, for a transaction of the Structured PIPE, the approval of the shareholders might be required.
A big quantity of stock is normally sold to well-trained investors for a long time, making sure that the firm secures financial resources it requires. Since the PIPE stock does not require to register with the Securities & Exchange Commission, transactions are dealt in a more efficient manner with fewer admin essentials as compared to the secondary offers.
However, the stockholders are able to sell their shares in a short time span, bringing the market price down. If it falls under the determined threshold, the firm might need to issue extra shares at a fairly less price. It drops the investment value of the investors. It is beneficial for the short sellers that they can sell their stock reducing the stock price. It results in PIPE shareholders, who are in large number, ownership of the firm. They can avoid this situation if they fix the least price of stock under which no compensatory shares are issued.
In the month of February in 2018, the owner of Taco Bell & KFC, Yum! Brands declared that it was going to buy two hundred million US dollars of GrubHub shares (a takeout co.) via a PIPE. In such a situation, it forced the PIPE to make a partnership in 2 firms attempting to raise the sales using delivery and pickups at its restaurants. The formed liquidity enabled GrubHub to develop its delivery network in the United States and get an ordering experience for the clients of both firms. It also expanded the BoD (Board of Directors) from nine to ten, making an addition of a Yum!’s representative.
References for PIPE Transaction
Academic Research on Private Investment in Public Equity Deals
A study of Public Private Partnership models, Satish, D., & Shah, P. (2009). IUP Journal of Infrastructure, 7(1), 22. A basic industry that each country requires to establish for overall progress is the infrastructure. But, India and other developing countries have fewer resources. Its government is striving to make its GDP double through investments in this sector. This paper stresses on the projects related to this industry in India and evaluates the progress of these projects.
PIPEs: A Canadian Perspective, Carpentier, C., L’Her, J. F., & Suret, J. M. (2005). The Journal of Private Equity, 41-49. This paper analyses the Private Investment in Public Equity from the prospects of the Canadian economy.
The investment strategies of sovereign wealth funds, Bernstein, S., Lerner, J., & Schoar, A. (2013). Journal of Economic Perspectives, 27(2), 219-38. SWFs (Sovereign Wealth Funds) are the main investors on an international level. The authors stress on the agency issues related to these funds, such as how to deal with the transparency demands, how to resolve sheer size issue, etc. They highlight how several methods give clues to solve these problems using DWFs.
Structuring PIPE transactions in key European jurisdictions, Jones, B. A., Hurlock, M. H., & Henry, P. R. (2003). In Int’l L. (Vol. 37, p. 23). This research explains how to structure the transactions of PIPE in the main jurisdictions of Europe.
The illiquidity puzzle: theory and evidence from private equity, Lerner, J., & Schoar, A. (2004). Journal of Financial Economics, 72(1), 3-40. This paper proposes a model of liquidity in which one can model the security’s liquidity clearly being an option variable. The authors examine its predictions with respect to the private capital sector. Whether the stockholders can invest in this sector or not. If there are limited partners of funds for private capital, the limitations of transferability will less likely to prevail.
Infrastructure and development, Prud’Homme, R. (2005). In Annual World Bank Conference on Development Economics(pp. 153-80). This study provides information about the infrastructure and its role in the development of a country. If a country lacks the investment resources for the infrastructure industry, what it can do to increase it?
Brazilian health biotech—fostering crosstalk between public and private sectors, Rezaie, R., Frew, S. E., Sammut, S. M., Maliakkal, M. R., Daar, A. S., & Singer, P. A. (2008). Nature biotechnology, 26(6), 627. Brazil is a leading country in the field of biomedical science. But there remains a tension in the private and public industries of this country, which is definitely a hurdle in the development of its health sector specifically in the biotech innovation.
A comparison of penny stock initial public offerings and reverse mergers as alternative mechanisms to going public, Floros, I. V., & Shastri, K. (2009). This paper entails a comparison in companies that become public with the help of PSIPOs (Penny Stock Initial Public Offerings and the ones which use RMs (Reverse Mergers). The latter are small, less profitable, expensive plans and restricted operational history. The stockholders of PIPE keep possession stake tracking Reverse Mergers. There are more possibilities that PSIPOs company managers cash out.
Monitoring via staging: Evidence from Private investments in public equity, Dai, N. (2011). Journal of Banking & Finance, 35(12), 3417-3431. The author mentions the reasons for and results of staging in PIPEs. Just like venture equity staging, the shareholders use the staging policy being a monitoring method to lessen data asymmetry and issues of agency. Staging minimises the financing cost having a +ve relationship with the issuers of PIPE.
PIPEs, Sjostrom Jr, W. K. (2007). Entrepreneurial Bus. LJ, 2, 381. This paper elaborates the Private Investment in Public Equity (PIPE) and its uses and abuses.
Examining the Pipeline: A Contemporary Assessment of Private Investments in Public Equity (PIPEs), Steinberg, M. I., & Obi, E. U. (2008). U. Pa. J. Bus. L., 11, 1. The writers evaluate the substitutes of traditional equity financing, i.e. Private Placement and Registered Offers. PIPE are comparatively emerging substitutes. PIPE can be useful to its stockholders as well as the issuers. In the end, the authors also cover the criticism of PIPEs and their negative consequences.
The rise of private equity media ownership in the United States: A public interest perspective, Crain, M. (2009). International Journal of Communication, 3, 32. This paper investigates the scope, implementation and logic of the private capital takeovers in the media industry of the US in the past ten years. The financial landscape enables them to make progress. The private capital challenges efficient media rules and its comparison with the corporate media.
Why do firms issue private equity repeatedly? On the motives and information content of multiple PIPE offerings, Floros, I. V., & Sapp, T. R. (2012). Journal of Banking & Finance, 36(12), 3469-3481. This article checks the reasons for private capital problems propensity to become a source of debt again and again for public companies. The authors draw a conclusion that these are an acute requirement for cash for small scale businesses.