Private investments in public equity (PIPEs) have been around for over a decade, and for much of that time they've had the unsavory reputation of being a funding vehicle of last resort for small companies in desperate need of money. But the last few years have seen the growing maturity of the PIPE market. A new crop of industry newsletters, conferences and databases has sprung up, and a growing number of midsize companies are turning to PIPEs to fund growth.
PIPEs are transactions in which accredited investors purchase equity or equity-linked securities directly from public companies in a private placement. "The easiest way to think of it is almost as a reverse public offering," says Thomas Rose, partner with law firm Sichenzia Ross Friedman Ference LLP in New York City. "Rather than a traditional public offering -- where you go to an underwriter and prepare documents and file everything with the SEC, then go out and market the transaction either to a select group of institutions or to a retail base of purchasers -- you actually do the sale privately first. Then, after you do the private sale, you go to the SEC and generally register the offering for resale."
Critics of PIPE transactions -- and there are many --claim these deals lack transparency and invite abuses such as illegal trading on inside information. They point to a long list of SEC investigations that have targeted PIPE players, including brokerages and hedge funds, over the past few years.
But there's no question that the PIPE market is in an upswing. PIPE issuers raised $23 billion in the first half of 2006 -- more than double the $10.5 billion they raised in the first half of 2005 -- according to DealFlow Media, a Jericho, N.Y.-based organization that tracks the market. The average dollar size of PIPE deals in the first six months of 2006 was $23.3 million, up 66 percent from the same period in 2005.
Rose attributes PIPEs' soaring popularity to two factors: cost savings and processing speed. "It's a much more cost-efficient process than going through an underwriting scenario," he reports. "You're going to pay some sales commission, but the other transactional costs -- legal and accounting and so on -- are tremendously less in a PIPEs scenario.
"And there's also a speed and certainty; these transactions can occur sometimes in a matter of only a few days," Rose adds. "You don't have to plan six months ahead and take market risk and see what's going to happen out there. You can decide you need 'X' dollars, find a placement agent and, in a relatively short period of time, complete the documentation and have the cash in the bank."