What is a private investment in public actions – PIPE?
Private investment in public capital (PIPE) consists of buying shares listed on the stock exchange at a price lower than the current market value (CMV) per share. This purchase method is a practice of investment firms, mutual funds and other large accredited investors. A traditional PIPE is one in which common or preferred shares are issued at a fixed price to the investor – a structured PIPE issues common or preferred shares of convertible debt.
The purpose of a PIPE is that the issuer of the security raises capital for the public enterprise. This financing technique is more effective than secondary offers, due to fewer regulatory issues with the Securities and Exchange Commission (SEC).
Key points to remember
- Private investment in public capital (PIPE) occurs when an institutional or other type of accredited investor buys shares directly from a public enterprise below the market price.
- Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise money for them faster.
- The reduced price of PIPE shares means less capital for the company and their issue effectively dilutes the current shareholder participation.
How does private equity investment work
A publicly traded company can use a PIPE when it obtains funds for working capital, expansion or acquisitions. The company can create new shares or use new ones from its supply, but the shares are never put on the stock market. Instead, these large investors buy the company’s shares in a private placement, and the issuer files a resale registration statement with the SEC.
The issuing company usually obtains its funding – that is, investors’ money for the stocks – within two to three weeks, rather than waiting several months or more, as it would with a secondary share offering. Registration of new shares with the SEC generally becomes effective within one month of filing.
Considerations for PIPE buyers
PIPE investors can buy shares below market price as a hedge against falling stock prices after news of PIPE is published. The discount also serves to compensate for a certain lack of liquidity in the shares. This offer being a PIPE, buyers cannot sell their shares until the company has filed its resale registration statement with the SEC. However, an issuer cannot generally sell more than 20% of its outstanding shares at a discount without having received the prior approval of the current shareholders.
A traditional PIPE agreement allows investors to buy common shares or preferred shares that are convertible into common shares 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. Because of these advantages, traditional PIPEs are generally valued at or near the market value of the stock.
With a structured PIPE, preferred shares or debt securities convertible into common shares are sold. If the securities contain a reset clause, new investors are safe from downside risks, but existing shareholders are exposed to the increased risk of diluting the value of the shares. For this reason, a structured PIPE transaction may require the prior approval of the shareholders.
Advantages and disadvantages of PIPES
Private investment in private equity has several advantages for issuers. Large amounts of stocks are generally sold over the long term to sophisticated investors, ensuring that the business gets the financing it needs. PIPEs can be particularly beneficial for small and medium-sized public enterprises, which may find it difficult to access more traditional forms of equity financing.
Because PIPE actions do not need to be registered in advance with the SEC or meet all of the usual federal registration requirements for public offerings, transactions go more efficiently with fewer requirements administrative.
However, on the downside, investors can sell their stocks in a short period of time, driving down the market price. If the market price falls below a defined threshold, the company may have to issue additional stocks at a considerably reduced price. This new share issue dilutes the value of shareholders’ investments.
Short sellers can take advantage of the situation by repeatedly selling their shares and lowering the stock price, which could lead to investors in PIPE holding the majority of the company. Setting a minimum price per share below which no compensatory stock is issued can avoid this problem.
Quick funding source
Less paperwork and filing requirements
Reduced transaction costs
Reduced share price (for investors)
Diluted share value (for current shareholders)
Buyers limited to accredited investors
Share price at a reduced price (less capital for the company)
Potential shareholder approval
Real example of a PIPE
In February 2020, Yum! Brands (YUM), owner of Taco Bell and KFC, has announced that it is purchasing $ 200 million worth of GrubHub shares of the takeout through a PIPE. In this case, Yum! has led PIPE to forge a stronger partnership between the two companies to increase sales in its restaurants through pick-up and delivery. The additional liquidity has 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 extended its board from nine to ten, adding a representative from Yum!