• It is therefore primarily worthwhile for SMEs
• Private placements remain unaffected by stock market sentiment
The main purpose of an IPO is to raise capital, which is usually used by the company to finance new projects. A classic initial public offering is often a so-called IPO procedure (Initial Public Offering), whereby shares are placed on the stock exchange or offered to interested investors for the first time.
PIPE transaction vs. IPO
However, an IPO process is not the only way for companies to list their shares on the stock exchange. For example, there is also an alternative form of financing using a PIPE transaction. PIPE is the abbreviation for Private Investments in Public Equity. In the financial world, this term refers to the private placement of shares in the share capital, such as common stock or preferred stock.
In contrast to a classic initial public offering (IPO), the shares that are issued via a PIPE transaction are not offered for free trading, but only to a manageable group of investors. The respective company therefore only addresses investors who have been determined in advance and thus refrains from offering its own share certificates to the public. Accordingly, possible existing shareholders will not receive any subscription rights for the new shares in such a procedure.
An IPO in fast forward
The PIPE procedure has its origins in the USA and is part of common stock exchange practice there. Many American companies appreciate the uncomplicated process of such a transaction. Because while the specifications and regulations for a conventional IPO are quite high, the issue via PIPE is only subject to relatively manageable conditions. A PIPE transaction can usually be carried out many times faster than a classic initial public offering.
The time frame of a PIPE transaction is only between 30 to 120 days. The due diligence, which investors usually start about a week after the preliminary negotiation phase, can be completed within two to three weeks. After swift negotiation and signing of the respective contracts, the final issue can take place after just four weeks.
For this type of company…
A private investment in public equity is usually sought by so-called SMEs, i.e. small and medium-sized companies, which often operate in very capital and research-intensive sectors. The issuing companies therefore often come from the technology, pharmacy, biotechnology and medical technology sectors. Due to their manageable size and usually very poor analyst coverage, these companies often have very little chance on the public capital market.
PIPEs can be used to support companies that have no other financing alternatives. Because even for classic debt capital or a bank loan, companies have to provide the necessary collateral, which is not always available at a very early stage.
… or investors, a PIPE procedure is worthwhile
Consequently, companies that issue their shares using a PIPE transaction are only suitable for very risk-aware investors such as private equity funds, venture capital funds and hedge funds. Because private equity funds in particular usually have a very long investment horizon and have a high level of expertise in this segment. In addition, such funds often have a direct influence on the management of the respective company and, following an investment, claim a seat on the board of directors or on the management board.
However, PIPEs have long been interesting not only for long-term investor groups, but of course also for more short-term speculators such as hedge funds. However, their investment decision is not necessarily based solely on a comprehensive due diligence check, but often on factors such as the bid-ask spread or the expected volatility.
Advantages of a PIPE transaction
There are numerous reasons for a PIPE process for small and medium-sized companies. The due diligence audit effort is relatively low, which saves considerable costs. Furthermore, the respective company saves various marketing costs due to the very limited number of investors. In addition to the lower transaction costs, the fast processing of the capital market procedure also speaks in favor of this type of issue. In this way, a company can raise fresh capital and invest in new projects within just a few weeks.
In addition, due to their hybrid structure between private placement and public placement, PIPEs are characterized by their relatively stable form of financing. Accordingly, they often remain unimpressed by public sentiment on the capital markets.
In addition, due to their very flexible design options, PIPEs offer an opportunity to raise capital for a large number of companies that would not be able to gain a foothold on the free capital market.
Disadvantages of an emission via PIPE
However, the numerous advantages of PIPE transactions are offset by some serious disadvantages. Raising capital using a PIPE procedure is often very expensive for the respective company, since the rights granted to the investors are often considerably greater than on the public capital market.
Regardless of this, very short-term PIPE investors can trigger considerable selling pressure relatively quickly, which can quickly become a significant problem due to the manageable number of investors. In addition, issues via the PIPE procedure often have a very negative signal effect on capital market participants, since the very fast processing is usually considered insufficient. Accordingly, PIPEs tend to have a dubious reputation, especially among conservative investors.
Pierre Bonnet / finanzen.net
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