Private investment in public equity - PIPE

Private investment in public equity - PIPE

As the name suggests, PIPE involves private equity participants investing in companies whose shares are publicly traded. Thus, private funds are directly infused into the listed company. Generally, the transaction involves private participants (who are a limited group of investors or Institutional investors) and the listed companies which are looking for funds. Thus, the companies allot the shares directly to the investors.

Why should a listed company look for private equity funds ?

All the companies, at what ever stage of life cycle they may be, require funds. The desired end usage may be for repayment of debt, acquisitions, entry into new markets, improving the operations etc., If the market conditions are promising and the market is in bull phase, these companies will for sure go for follow up public offer. However, if the market is in bear phase, then the companies will not be interested in approaching the public for the funds they require. This is because, the market prices of the shares of the companies may be lower than their intrinsic value. If the company approaches public during these times, the company has to under sell the shares at prices which are very much lower than the intrinsic value. The public also may not be interested in buying the share a the price at which the follow up public offer is announced. These factors drive the listed companies to look for PIPE funding.

Why should a private equity investor / institutional investor invest in a public company ?

As said earlier, during the bear phase / gloomy market conditions the valuations of the listed companies will be generally lower than the intrinsic value and the retail investors will not be in mood to buy the shares in these companies. This results in getting a better acquisition price for the private equity investors. The public companies which are looking for funds will be ready to issue shares at the price which will be mutually acceptable to both the parties.

Moreover, the private equity investors will also conduct the due diligence of the companies which are looking for funds. The out come of the due diligence will have great impact on the price at which the private investors want to acquire the stake. Any issues if identified during the due diligence process will further reduce the price at which the stake will be acquired by the private equity investors. Thus, the private investors will get the stake in the public companies at promising values. The private equity players will also have an easy route for exit as the companies are already listed.