By James S. Cassel and Avi Kent
The rapid growth of the PIPE market (Private Investment in Public Equity) during the past decade has significantly changed the capital markets landscape for small and medium-sized publicly traded companies. In fact, PIPE activity in 2007 may result in a record year both in terms of number of transactions and total dollars invested.
Once a prime source of funding for cash strapped small-cap companies, PIPEs have become a mainstream source of financing for companies seeking rapid access to competitively priced capital from institutional investors as well as from individuals.
A PIPE transaction is a private placement to investors of a publicly traded issuer’s securities, where the sale is conditioned upon a subsequent registration statement being filed with, and declared effective by, the Securities and Exchange Commission. Issuers generally agree to file a registration statement with the SEC within 30 to 60 days and to use its best efforts to have the registration statement declared effective by the SEC within 60 to 120 days after the closing. When the registration statement becomes effective, an investor may, at its discretion, resell the securities into the public market.
PIPEs provide alternative financing solutions for public companies in circumstances where a traditional underwritten public equity offering is not practical, not desirable, or perhaps, not achievable. A company may seek a PIPE financing for one or more of the following reasons:
• The company’s market capitalization is too small or the public markets are not favorable for the company to undergo a traditional underwritten public offering.
• The company wishes to complete a small transaction rapidly.
• The company wishes to strategically target its investor base.
• The company seeks flexibility for the purpose of designing a specific financing structure.
• The company wishes to avoid the time consuming SEC registration process associated with public offerings.
• The company wishes to keep the financing confidential.
2006 was a record year for U.S. PIPE activity in terms of both the number of transactions completed and the total dollars invested. As reported by Sagient Research Systems, Inc., nearly $30 billion was invested in more than 1, 300 transactions – with the average deal size exceeding $20 million. This growth has continued into 2007, which is expected to be another record year.
The PIPEs industry is a highly negotiated marketplace and PIPEs can be structured in a variety of ways depending upon a company’s objectives and profile. The three types of structures most typically seen are Common Stock issuances, Convertible Preferred Stock issuances and Convertible Debt issuances.
Common Stock issuances, often referred to as “straight equity” PIPEs, are the most common type of structure seen in today’s PIPE environment, and they accounted for more than half of all PIPE transactions in 2006. Common Stock issuances are typically issued at a discount to market and may include warrant/option coverage to purchase additional shares at a later date. Convertible Preferred Stock and Convertible Debt structures, often referred to as “structured PIPEs”, are typically issued at an issuer’s current stock price or at a premium to an issuer’s current stock price and may include warrant/option coverage to purchase additional shares at a later date.
PIPEs involve significant risks and are therefore generally offered to qualified institutional buyers and/or accredited investors. Typical PIPE investors include specialized PIPE funds, public crossover funds, mutual funds, private equity funds, hedge funds, and financial institutions. Historically, hedge fund investors have accounted for a significant percentage of PIPE investments. This trend continues today. As the PIPE market has become more main stream, however, there has been a significant increase in PIPE investments from other investors such as pension funds, banks, insurance companies and charitable organizations.
Typical PIPE issuers are growth companies (technology, healthcare, media, and consumer) and natural resources companies (oil and gas). In 2007, some of the most heavily funded industries in the PIPE market include oil and gas, pipelines, pharmaceuticals, mining and media companies, among many other industries.
PIPE issuers tend to be small to medium-sized businesses. In over 50% of all PIPE transactions in 2006, the issuer had a market capitalization below $50 million. Transactions for companies with a market capitalization ranging from $50 to $250 million accounted for approximately 32% of total PIPE transactions closed in 2006. Larger sized companies have also participated in the PIPE market. In early 2007, Sun Microsystems issued a’ $700 million PIPE with buyout firm Kohlberg Kravis Roberts – further evidence that PIPEs are becoming a major financing tool for large corporations.
