CORPORATE

FINANCE
PRIVATE INVESTMENT IN
PUBLIC EQUITY

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TABLE OF
CONTENTS

INTRODUCTION 1-2
1 Overview of PIPE
Objective
Accredited Investor
Structure
Variety

TYPES OF PIPE 3
2 Traditonal PIPE
Non-Traditional PIPE

PROS AND CONS OF PIPE 4

3 Advantages of PIPE
Disadvantages of PIPE

CONCLUSION 5
4 Real-Life Example
Conclusion

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PRIVATE INVESTMENT IN
PUBLIC EQUITY (PIPE)

What is Private Investment in Public quity (PIPE) ?

A private investment in public equity (PIPE) is a transaction in which a
publicly traded company sells its shares on the stock market to accredited
private investors at price lower than the current market value.

This typically happens when the value of a company's stocks has dropped, and
the company is seeking fresh funds. It's a method for a public company to
quickly tap into the stock markets. Even though they already have shares
traded publicly, this is an extra opportunity for investors through a special
agreement. The company commits to officially registering these extra shares
for public trading shortly after the deal is completed.

Invest Used By

Return Profit

Investor Equity Funds Business

Objective
The primary objective of a Private Investment in Public Equity (PIPE) is to
secure additional capital for the publicly traded company issuing the stock.
This financial approach proves to be more efficient than secondary offerings,
primarily attributed to the diminished regulatory complexities associated
with the market regulator like SEBI, SEC etc.

A PIPE transaction is generally an attractive alternative to a reporting issuer

that is required to raise money in circumstances where the issuer may not be
able to do so by way of a public offering, including:
Issuers in financial distress (or otherwise seeking to improve their balance
sheet.
Smaller issuers who may not have access to institutional investors
because of low market capitalization and a small trading float and for
whom the relative cost of a public offering may be a significant deterrent.

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Accredited Investor in PIPE

An accredited investor is someone, either an individual or a business

institution, authorized to engage in transactions with securities that are not
open to the general public. Additionally, these securities may or may not be
officially registered with a financial regulatory authority.
A business entity or institution aiming to invest in listed startups needs to
have a net worth of Rs. 25 crore to qualify as an accredited investor. Likewise,
for an individual to be recognized as an accredited investor, they should
maintain a liquid net worth of at least Rs. 5 crore and an annual gross income
of Rs. 50 lakh.
These criteria are established by the regulatory body to protect the interests
of investors. SEBI also ensures that accredited investors possess financial
stability to absorb any potential losses arising from unregulated securities.

How may PIPEs be structured?

These may be undertaken by way of:

Third party allotment of new shares or other securities on a non-pre-
emptive basis to institutional investors;
Contractual agreement between the company and an institutional investor
permitting the investor to purchase shares in the future; or
Acquisition of shares from existing shareholders.

Common Varieties of PIPE Transactions

PIPE transactions may involve the sale of common stock, convertible

preferred stock, convertible debentures, warrants, or other equity or equity-
like securities of an already-public company
There are a number of common PIPE transactions, including:
the sale of common stock at a fixed price
the sale of common stock at a fixed price, together with fixed price
warrants
the sale of common stock at a fixed price, together with re-settable or
variable priced warrants
the sale of common stock at a variable price
the sale of convertible preferred stock or convertible debt and
a venture-style private placement for an already-public company.

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Types of Private Investment in Public Equity (PIPE)

Private Investment in Private Equity

Non- Traditional Traditional

Traditional PIPE

In these the issuer engages in providing common and convertible preferred

stocks to accredited investors. These stocks are made available at set prices,
flexible prices, and exchange rates relative to market values. Additionally,
investors benefit from protection in the event of a takeover or merger
involving the underlying company. In such situations, investors have the right
to receive dividends.
This arrangement ensures that accredited investors have access to stocks with
clear pricing structures, including options for conversion, and safeguards their
interests in the case of significant corporate changes. This framework not only
offers investors investment opportunities at transparent rates but also
establishes a mechanism for their financial protection during transformative
events in the issuing company.

Non- Traditional PIPE

In these transaction revolves around the exchange of convertible debt

securities, such as preferred stock. Investors make payments at the closing,
which occurs after the initiation of the purchase agreement. These particular
stocks are sold at a price that can vary, and there are restrictions imposed by a
Securities Act Legend. This means that the securities come with certain legal
restrictions specified by the Securities Act.
This structured PIPE arrangement allows for the acquisition of convertible
debt securities, offering investors the opportunity to pay for these securities
after the agreement starts. The variable pricing and adherence to Securities
Act Legend restrictions contribute to the regulatory framework governing the
transaction, providing clarity and legal considerations in the process.

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Advantages of Private Investment in Public Equity

Private Investment in Public Equity, is a provision that allows companies to

raise capital from external sources other than the public stock market. It
offers several advantages:

For publicly traded companies, PIPE provides a more cost-effective and

promising alternative, serving as an immediate source of funds.
Investors benefit from PIPE by acquiring these stocks at prices below the
market value.
The placement agents active in the PIPEs market have close and ongoing
relationships with PIPEs investors and can market a proposed transaction
quickly and efficiently.
Small and medium-sized public companies can secure financing from
private investors through PIPE, especially when traditional equity
financing is challenging to obtain.
PIPE securities are offered to certified investors in substantial quantities
over an extended period.

Disadvantages of Private Investment in Public Equity

While Private Investment in Public Equity (PIPE) offers advantages, it also

comes with drawbacks:

In PIPE transactions, the issuing public company requires permission

from existing shareholders if it issues beyond 20% of outstanding shares.
Issuers are compelled to sell securities below current market values,
which is the trade-off for obtaining capital quickly.
Frequent buying or selling of these securities, including short selling, is
common, impacting share prices adversely.
These securities are exclusively available to accredited private investors
only not meant for general public.
As the market has become bigger and more popular, it has attracted less
reputable placement agents who are interested primarily in earning fees
and investors focused on the short-term structural gains possible with a
PIPE and not the investment quality of the issuer.

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Example of PIPE Transaction

In a real-world scenario of a Private Investment in Public Equity (PIPE)

transaction, we can look at Carnival Corporation's experience. In April 2020,
amidst the financial challenges caused by the COVID-19 pandemic, Carnival
Corporation, the world's leading leisure travel company, successfully secured
approximately $6.4 billion. This capital infusion resulted from a mix of
methods, including a public offering of shares, a private offering of senior
secured notes, and a Private Investment in Public Equity (PIPE).
The PIPE component involved the participation of Saudi Arabia's sovereign
wealth fund, the Public Investment Fund (PIF). Recognizing an opportunity as
Carnival's stock value was significantly impacted by the pandemic's effects on
the travel industry, the PIF acquired 8.2% of Carnival's common stock.
Carnival utilized the raised capital to fortify its cash reserves during a period
when its cruise operations were largely halted due to the pandemic.
Simultaneously, the Saudi PIF strategically acquired a substantial stake in the
company at a discounted price, anticipating the long-term recovery and
profitability of Carnival.
This example illustrates how a PIPE can serve as a strategic tool for a public
company to swiftly raise capital during challenging circumstances.
Additionally, it demonstrates how significant investors can leverage these
situations to acquire a notable stake at a potentially advantageous price.

Conclusion

Private Investment in Public Equity (PIPE) transactions serves as a dynamic

mechanism fostering collaboration between private investors and publicly
traded companies. This investment strategy has proven to be a valuable
avenue for companies seeking capital infusion while providing private
investors with unique opportunities for strategic investments. The symbiotic
relationship nurtured through PIPE transactions allows companies to access
funds swiftly, facilitating growth and strategic initiatives. However, it is
imperative for both parties to navigate regulatory considerations and align
their interests for optimal outcomes. As a flexible financial instrument, PIPE
transactions continue to play a crucial role in the evolving landscape of
corporate finance, offering a win-win scenario that bridges the gap between
private investment and public market dynamics. Overall, the resilience and
adaptability of PIPE transactions underscore their significance in shaping the
modern financial ecosystem.

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Corporate Finance Key Concepts

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Published: December 2023