Private Investment in Public Equity (PIPE) – An Overview PIPE Investment
Private Investment in Public Equity (PIPE) is a financing technique where accredited investors or institutions buy shares of publicly traded stock below the current market value (CMV) per share. PIPEs are commonly used by investment firms, mutual funds, and large, accredited investors. The issuer of the stock uses this technique to raise capital for the public company, which is more efficient than secondary offerings due to fewer regulatory issues with the Securities and Exchange Commission (SEC).
How Private Investment in Public Equity Works
Publicly traded companies use PIPE to secure funds for working capital to fund day-to-day operations, expansion, or acquisitions. The company creates new stock shares or uses some from its supply, but the equities never go on sale on a stock exchange. These large investors purchase the company's stock in a private placement, and the issuer files a resale registration statement with the SEC.
PIPE investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the PIPE gets out. The discount also acts as compensation for a certain lack of liquidity in the shares, meaning there can be delays in selling or converting the shares to cash. Since this offering was a PIPE, the buyers cannot sell their shares until the company files its resale registration statement with the SEC.
Advantages of PIPE Investment
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PIPEs offer several advantages for issuers. They ensure the company secures the funding it needs, and they can be particularly advantageous for small-to-medium-sized public companies that may have a hard time accessing more traditional forms of equity financing. Transactions proceed more efficiently with fewer administrative requirements, as PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings.
Disadvantages of PIPE Investment
On the downside, investors may sell their stock in a short amount of time, driving down the market price. If the market price drops below a set threshold, the company may have to issue additional stock at a significantly reduced price. This new share issue dilutes the value of shareholders’ investments, which can lead to a lower stock price. Buyers are limited to accredited investors, and there is potential need for shareholder approval.
Real-World Example of a PIPE Investment
In February 2018, Yum! Brands, the owner of Taco Bell and KFC, announced it was purchasing $200 million of takeout company GrubHub's stock through a PIPE. Yum! drove the PIPE to forge a stronger partnership between the two companies to increase sales at its restaurants through pickups and delivery.
Conclusion
PIPEs are a viable option for public companies looking to raise capital quickly and efficiently. They offer several advantages over traditional forms of equity financing, but they also come with certain disadvantages. It is important for issuers and investors to consider all factors before pursuing a PIPE, including potential dilution of shares and regulatory requirements.