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Private Investment in Public Equity (PIPE)

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Private Investment in Public Equity

Introduction to Private Investment in Public Equity (PIPE)

Private Investment in Public Equity (PIPE) is a deal between a company and private investors through which these private investors can purchase publicly traded shares at a price lower than the current market price. This practice is generally seen in Mutual Funds, Exchange Traded Funds (ETF), and Special Purpose Acquisition Companies (SPACs). PIPE investment is not performed through stock exchange or through IPO. These investments are performed directly between the private investors and the public company under the regulation of the SEC. 

Now the question arises, why does a company want to sell more shares to private investors? The simple answer would be to raise more capital. Especially in the context of SPACs, they can open a PIPE deal if they do not have enough capital from the IPO to complete a merger with a private company. PIPE investment saves the company’s time and helps raise more funds quickly. The company will reach out to private investors to sell unregistered shares often at a discount rate than the market price. After a specified period, the SPAC will file a resale registration statement in SEC to regularize the PIPE deal. PIPE deals generate a big chunk of cash in the overall capital of a SPAC. According to CNBC, the PIPE deals will possibly raise over 100 Billion dollars in the coming two years.

What is a SPAC?

A Special Purpose acquisition company (SPAC) is basically a shell company whose aim is to raise capital through Initial Public Offering (IPO) and acquire a private company with that capital. The founders of these SPACS are big business tycoons who are capable of utilizing the money raised from IPO. The SPAC company is managed and operated utilizing a fraction of cash from the capital. As a result, the amount held in the trust account might drop if they do not have any revenue. So sometimes while acquiring a private company, the capital held in the trust account might be a little bit short and the SPAC might need extra capital to go through the merger. This is exactly where the PIPE comes into play.

During a de-spac process, the SPAC have to disclose how much they are generating capital from PIPE deals. If the investor do not like the amount from the deal or the target they can vote for their dissatifaction. Also, they can redeem their stocks and get their money back at a NAV price plus some interest.

Who can engage in PIPE deals?

For the public stock market, the price per share is based on supply and demand. This means the people who invest in the stock determine the price of the stocks. Higher the demand in the stock market higher will be the price. But that is not the case in the context of PIPE deals. These deals are made outside of the public market. As a result, the public investors may not even have any idea about PIPE deals. People who can engage in PIPE deals are accredited investors.

Accredited investors are individuals or business institutions having a lot of money and can buy a large chunk of stocks at a preferred price. According to SEC rule 501 (a) of Regulation D, any investors can qualify as accredited investors if they have professional certifications, designations, or credentials. So the PIPE deals are reserved for institutional investors, mutual funds, hedge funds, and individuals with a lot of money who can afford these deals.

SPAC PIPE Lock-Up Period

As in the PIPE investment, public companies sell their unregistered securities at a discount to institutional investors. There is generally a lock-up period so that the investors cannot resell them into the market for instant high revenue. As the securities are unregistered, the lock-up period will continue until a registration statement is filed and declared as effective by SEC. Generally, the public company will file an S-3 registration statement for the registration of PIPE securities. Typically, a lock-up period might be 45 days to 90 days long. 

Risks and rewards of PIPE investment

  1. The main risk for a retail investor is that these PIPE deals can dilute the stake like SPAC warrants. When the lock-up period is over, the PIPE investors will be able to sell their shares in the public market. This will dilute the shares and the price of the stake will drop heavily.
  2. PIPE investors get a better-informed early mover advantage in SPAC deals.
  3. PIPE investors may have more information about the target. These investors would only invest in any SPAC if there is a higher possibility of generating more revenue after the merger. So the SPAC might disclose the target with whom they are merging. As a result, they are able to sell more shares to the private investors.

Final Words

Private Investment in Public Equity (PIPE) are the great methods for public companies to generate extra capital. These deals help public company to achieve their aim or complete their merger. But this brings risk for retail investors as they tend to dilute the share outstanding.

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