Pipe Investors – Private Investment in Public Equity – PIPE Investment

PIPE Investors – Private Investment in Public Equity (PIPE)

Private investment in public equity (PIPE) refers to PIPE investors buying a block of newly issued stock from a publicly-traded company.  Usually, at a price below the current market value. This purchasing strategy is used by investment firms, mutual funds, and other large, accredited investors. A standard PIPE investment is one in which the investor receives common or preferred stock at a fixed price.  Whereas, a structured PIPE investor receives common or preferred shares or convertible debt.

Ultimately, the PIPE issuer is looking to sell additional shares to quickly raise funds for a publicly-traded company. There are fewer regulatory difficulties with the Securities and Exchange Commission (SEC).  Therefore, this financing approach is more efficient than secondary offers.

Publicly-traded Offerings To PIPE Investors

Companies may choose to provide private investment in public equities in order to raise funds rapidly. Firms may also pursue this finance option if they have been unable to obtain money or financing elsewhere. For example, consider a small business that wants to expand into a new market. However, the company has attempted and failed to obtain business financing. Instead, management decides to issue a PIPE deal to attract new investors.  Also, in order to raise the funds required to fund the company’s expansion ambitions. In comparison to a secondary offering, a PIPE investment allows the company to compete more easily. Further, this type of offering is not limited to a specific size or type of company. This form of investment can be made by any publicly traded corporation to institutional or accredited investors.

In a PIPE offering, investors agree to buy a set number of restricted shares from a company at a set price. In exchange, the corporation undertakes to file a resale registration statement with the SEC. This allows the investors to resell the shares to the general public. PIPE offers can potentially dilute the value of existing shares by increasing the supply of a company’s stock on the market.

PIPE Investors – How a Private Investment in Public Equity Works

A publicly traded firm may use a PIPE offering to secure financing for working capital.  The proceeds can be used to fund day-to-day operations, expansion, or acquisitions. The corporation may issue new stock shares or use existing ones.  In either scenario, the stocks are never traded on a stock exchange.  Instead, PIPE investors buy the company’s stock through a private placement.  Afterward, the issuer files a resale registration statement with the SEC.

The issuing company often receives funding—that is, money from investors for the shares—within two to three weeks.  This is compared to many months or longer with a secondary stock offering. The new shares are normally registered with the SEC within a month of filing. However, an issuer cannot normally sell more than 20% of its outstanding stock at a discount without first gaining agreement from present shareholders.

A PIPE (Private Investment in Public Equity) refers to any private placement of securities of an already-public company that is made to selected accredited investors (usually to selected institutional accredited investors) wherein investors enter into a purchase agreement committing them to purchase securities and, usually, requiring the issuer to file a resale registration statement covering the resale from time to time of the securities the investors purchased in the private placement. PIPE transactions may involve the sale of common stock, convertible preferred stock, convertible debentures, warrants, or other equity or equity-like securities of an already-public company.  (Source: sec.gov)

Why Are PIPE Investors Able To Buy at a Discount?

PIPE investors buy the stock at a discount to the market price as a hedge against the share price falling.  Whenever a large block of shares becomes available, the existing price can experience downward pressure.  This is in response to a sharp increase in supply as word of the PIPE spreads. The discount also compensates for the shares’ lack of liquidity.  Invariably, there will be delays in selling a large block and converting the shares to cash. With a PIPE offering, the buyers will be unable to sell their shares until the issuing company files its resale registration statement with the SEC. However, an issuer cannot normally sell more than 20% of its outstanding stock at a discount without first gaining agreement from present shareholders.

A standard PIPE agreement allows investors to purchase common stock or preferred stock that is convertible to common stock at a set price or exchange rate. Investors may be able to receive dividends or other payoffs if the company is soon to be acquired or merged. Dividends are payments made by corporations to their shareholders or investors in the form of cash or shares. Because of these advantages, traditional PIPEs are often priced at or near the market value of the underlying stock. Preferred stock or debt securities convertible to common stock are sold through a structured PIPE. If the securities include a reset provision, new investors are protected from downside risks.  However, existing stockholders face a greater risk of share value dilution. As a result, prior stockholder approval may be required for a structured PIPE transaction.

PIPE Investors – Advantages and Disadvantages

Issuers benefit from PIPE (private investment in public equities) offerings in numerous ways.

Advantages 

• Large blocks of shares can be sold – Large amounts of shares are often sold to informed investors, ensuring that the company receives the money it requires.
• Small to medium-sized firms can benefit – PIPEs can be especially beneficial for small-to-medium-sized public companies.  These firms typically struggle to get more traditional types of equity funding.
• Streamlines the funding process – Also, transactions move more quickly and with fewer administrative restrictions.  This is because PIPE shares do not need to be registered in advance with the SEC.  Nor, are they required to meet all of the standard federal registration requirements for public stock offerings.

Disadvantages

• A rapid increase in supply – Investors may sell their stock in a short period of time, causing the market price to fall. If the market price falls below a certain level, the corporation may be forced to issue additional stock at a much lower price.
• Dilutes existing shares – This new share offering dilutes the value of shareholders’ assets, perhaps resulting in a reduced stock price.
• Market & shareholder reaction – Short sellers may take advantage of the scenario by selling their shares frequently and decreasing the share price.  Ultimately, the PIPE investors could end up owning the majority of the company. This difficulty can be avoided by establishing a minimum share price below which no compensatory stock is issued.

PIPE Investment – Example

Yum! Brands are one of the world’s largest restaurant companies.  And, Grubhub is the nation’s leading online and mobile food-ordering company.  The two companies announced a new partnership in February of 2018.  The partnership was to strategically drive incremental sales to KFC and Taco Bell restaurants in the United States.  The strategy specifically targets online ordering for pickup and delivery. YUM also agreed to buy $200 million in common stock from Grubhub, subject to customary closing conditions through a PIPE agreement. This investment provides Grubhub with additional liquidity to accelerate the expansion of its industry-leading U.S. delivery network.  Also, it drives more orders to YUM restaurants and improves the ordering and delivery experience for diners, restaurants, and drivers.

Yum! Brands (NYSE: YUM), one of the world’s largest restaurant companies, and Grubhub (NYSE: GRUB), the nation’s leading online and mobile takeout food-ordering company, today announced a new partnership to drive incremental sales to KFC and Taco Bell restaurants in the U.S. through online ordering for pickup and delivery. YUM also entered into an agreement with Grubhub to purchase $200 million of common stock, subject to customary closing conditions, an investment that will provide Grubhub with additional liquidity to accelerate the expansion of its industry-leading U.S. delivery network, drive more orders to YUM restaurants, and further enhance the ordering and delivery experience for diners, restaurants, and drivers. (Source: Yum Brands & Grubhup Press Release)

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