What is a private investment in public capital (PIPE)?

Private investment in public capital (PIPE) is the purchase of shares listed on the stock exchange at a price lower than the current market value (CMV) per share. This mode of purchase is a practice of investment firms, mutual fund, and other big ones, qualified investors. A traditional PIPE is a PIPE in which common or preferred shares are issued at a fixed price at the investor, while a structured PIPE issues common or preferred shares of convertible debt.

The purpose of a PIPE is for the issuer of the share to raise capital for the public company. This financing technique is more efficient than secondary offers due to fewer regulatory issues with the Security and Trade Commission (SECOND).

Key points to remember

  • Private investment in public capital (PIPE) occurs when an institutional or accredited investor purchases shares directly from a public company below the market price.
  • Because they have less stringent regulatory requirements than public offerings, PIPEs save businesses time and money, and raise funds faster.
  • The lower price of PIPE shares means less capital for the company, and their issuance effectively dilutes the current shareholder stake.

How private investment in public capital works

A publicly traded company can use a PIPE to raise funds for working capital to finance day-to-day operations, expansion or acquisitions. The company can create new shares or use some of its reserves, but the shares are never offered for sale on the stock exchange.

Instead, these big investors buy the shares of the company in a private placement, and the issuer files a resale registration statement with the SEC.

The issuing company typically gets its funding, i.e. investor money for the shares, in two to three weeks, rather than waiting several months or more, as would be the case with an offer to invest. ‘secondary actions. Registration of new shares with the SEC generally takes effect within one month of filing.

Special considerations for PIPE buyers

PIPE investors can buy stocks below market price as a hedge against falling stock prices after the PIPE news breaks. The discount also serves as a compensation for a certain lack of liquidity in shares, which means that there may be delays in selling or converting shares into cash.

Since this offer was a PIPE, 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 shares at a discount without receiving the prior approval of the current shareholders.

A traditional PIPE deal allows investors to buy ordinary actions Where preferred stock convertible into common stock 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 gains. Dividends are payments of cash or shares from companies to their shareholders or investors. Because of these advantages, the price of traditional PIPEs is usually at or near the market value of the stock.

With a structured PIPE, preferred stock or debt securities convertible into common stock are sold. If the securities contain a reset clause, new investors are protected from downside risks, but existing shareholders are exposed to a higher downside risk. dilution in stock values. For this reason, a structured PIPE transaction may require prior shareholder approval.

Advantages and disadvantages of PIPE

Private investment in public stocks has several advantages for issuers. Large amounts of stocks are usually sold long-term to sophisticated investors, ensuring the company has the financing it needs. PIPEs can be particularly beneficial for small and medium-sized Public enterprises who may have difficulty accessing more traditional forms of equity financing.

Since PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public offerings of shares, transactions run more efficiently with less administrative requirements.

However, on the downside, investors may sell their stocks in a short period of time, causing the market price to fall. If the market price drops below a defined threshold, the company may be required to issue additional shares at a significantly reduced price. This new issue of shares dilutes the value of shareholders’ investments, which can cause the share price to fall.

Short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price, which could result in PIPE investors owning a majority stake in the company. Fixing a minimum share price below which no compensatory action is issued can avoid this problem.

Advantages
  • Quick source of capital funds

  • Less paperwork and filing requirements

  • Reduced transaction costs

  • Reduced stock prices (for investors)

The inconvenients
  • Diluted share value (for current shareholders)

  • Buyers limited to accredited investors

  • Discounted share price (less capital for the company)

  • Potential need for shareholder approval

Real example of a PIPE

In February 2018, Yum! Brands (YUM), owner of Taco Bell and KFC, has announced that it is $ 200 million purchase shares in takeout company GrubHub via a PIPE. In this case, Yum! led PIPE to forge a stronger partnership between the two companies to increase sales in its restaurants through pickup and delivery.

The additional liquidity allowed GrubHub to expand its delivery network in the United States and create a more seamless ordering experience for customers of both companies. GrubHub also expanded its board from nine to ten, adding a representative from Yum!