Essay on Private Investment in Public Equity

Essay on Private Investment in Public Equity

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Private investment in public equities (PIPE) market is one of the most attractive markets for qualified individual investors and accredited institutional funds. Since the late 1990s, PIPE transactions have been increasing dramatically, raising $105 billion of equity capital over the past two years. In 2010 alone, there were a total of 1,203 PIPE deals. Top Wall Street executives are increasingly becoming involved in PIPE transactions as placement agents. For investors, PIPEs have become attractive due to regulatory challenges in executing control investments like private equity or venture capital. Since PIPEs involve lesser SEC regulations and do not require public underwritten offerings, the deals are time and cost efficient, thus making it attractive to public companies. During the credit crisis in 2008, when the companies could not access the equity markets, they depended on PIPE transactions to raise quick capital.

A PIPE deal is a directly negotiated transaction between an accredited investor and an issuer, a public listed company. PIPEs have been tapped by small to medium-sized companies in industries that need frequent funding and mature companies that seek growth capital. Small to medium-sized companies find it expensive to procure funding from traditional equity financing. PIPE transactions provide a quick and easy solution to their capital requirements. PIPEs aid the expansion, restructuring or acquisition operations of mature companies.

In a PIPE deal, the issuer offers a stake in the company to the investor in return for capital. The stake can be in the form of common or preferred stock, convertible bonds, or warrants, newly issued directly from the company’s treasury. It is sold to the investor at a discount to...

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...passive. Unlike other stockholders of the company, they do not control the board or corporate decisions or liquidity events of the company.
2. Liquidity: Generally, PIPE investments offer short-term liquidity as part of its resale registration process. However, in certain PIPE investments, the company requires the investor to limit resale of securities to a specific period of time.

PIPE investments differ from other forms of investments namely private equity or venture capital in the above-mentioned liquidity and control dynamics of the transactions. PIPEs are a unique investment avenue providing investors with many advantages. As the PIPE market grows, investors can avail the increasing opportunities to invest in a broad range of companies. PIPE transactions are great investment vehicles assuring returns and saleability for a passive and long-term investor.

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