While many small companies struggle to raise money, some have reaped the benefits of investing in private investment in public equity (PIPE). When done for the right reasons, investing in PIPEs helps small companies gain access to capital at a low cost, increase institutional investment, and improve the public float of securities.
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A PIPE deal happens when there’s a financial agreement between companies—one issues public securities privately (issuer) and the other one invests (investor) in those securities at a lower market value. This is done with the intention of helping the issuer raise capital. While the deal is done privately, the company's securities are traded publicly. The securities may be in a form of stock, equity, or company bonds.
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Benefits of PIPEs
There are a number of reasons why PIPE is a strong option for accessing capital. The US Securities and Exchange Commission cites the following reasons:
• A PIPE transaction can be done quickly and efficiently.
• It’s cheaper than a registered public offering.
• Although the issuers file a registration statement covering the shares issuable in the deal, they are not required to incur that expense without receipt of the investment proceeds.
The SEC explains, however, that PIPEs don’t come without risks. When not done properly, bad situations may arise. So it’s vital that issuers understand the market and know the reputations of the business players to avoid situations getting out of hand.
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Alex von Furstenberg served as the co-managing member and chief investment officer of Arrow Capital Management LLC, a private investment firm focusing on global public equities. Access this Twitter page for more information.
