Private Investment in Public Equity (PIPE) for Mutual Funds

Private investment in public equity (PIPE) is the selling of common shares to private interest groups. Common shares are typically listed on the general stock exchange for purchase by common investors with low capitalization. Typically, a company would prefer to list common shares because it limits the possibility one investor will gain a controlling interest in the equity of the business. In fact, businesses buy back common shares when they no longer need the investor funding so no outside investors can take over the business. Turning to private equity investors presents risks for companies, but it also presents very necessary revenue streams.

Why Do Companies Offer PIPE?

Companies would generally steer away from PIPE because it can open them up to a takeover. If one private investor gains hold of too much of the company's stock, the board of directors of the company would be under new management. However, companies do rely on PIPE in certain markets. For example, in the late 2000s, when the market was in a deep recession, common shares were simply not being purchased at the rate companies needed. They did not have access to enough public equity, so they needed to begin turning to private investment. Private equity groups capitalized on this market need, purchasing large amounts of equity in companies that would have previously been off limits to them. 

Who Is Involved in PIPE?

The Securities and Exchange Commission oversees and certifies PIPE transactions. The transaction is either recorded as a private placement or through a Registration Statement. Private placement opportunities were popular in the 1980s, but they fell out of popularity in the decades that followed. In the deep recession of the last 2000s, though, private placement again picked up steam. The few investors who were still willing to gamble on the volatile market were large capitalization investors. Common investors may have lost the entirety of their purchasing power to falling portfolio profits in the previous years. In general, then, the publicly traded companies, the SEC and a private equity group or hedge fund are the three parties involved in a PIPE transaction.

What Is the Risk of PIPE?

The risk of a PIPE transaction is three-fold. For a company, allowing a private investor to gain too much of a stake in the company's stock can lead to contamination of the corporate agenda. Pleasing the investor may be a primary concern, despite the board of directors' goals for the business. For the investor, the risk is purely financial. A PIPE transaction represents a significant amount of investment, typically in the millions of dollars range. If the investment turns sour, the private equity group will lose the entirety of this sum. Further, the group is responsible to its own investors. A private equity group typically operates on a commission basis, meaning it will not profit if it does not make sound investments. For a common investor, the risk of a PIPE transaction is the fact that it constricts and alters the marketplace. The presence of large investor groups in the otherwise public sector can skew stock prices, take valuable equities off the market and lower profits for common investors.

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