Deploying Capital with PIPEs
In the inaugural episode of the Choate Business Insights podcast series, John Pitfield, Dan Riley, and Tobin Sullivan discuss private equity investments in public companies through Private Investment in Public Equity (PIPE) transactions, including the current trends and structure of PIPE transactions.
Welcome to the Choate Business Insights Podcast. On this show, we deliver compelling perspectives on trending topics at the intersection of business and law. Each episode provides a discussion with Choate attorneys on the important issues that matter most to our clients.
John Pitfield: Hi, my name is John Pitfield. I am a partner in Choate’s Corporate Group. I am here today with Dan Riley, also a partner in our Corporate Group and Tobin Sullivan, a principal in our Corporate Group to talk with you about private equity investments in public companies through PIPE transactions. With that, I will turn it to Dan to kick it off.
Dan Riley: Great, thanks John. So we are here to talk about PIPE transactions where PIPE stands for Private Investment in Public Equity. In the typical market environment, it’s not a usual way for a private equity sponsor to deploy capital because there is better uses for capital really in the private market through LBOs or through private transactions and then public companies normally have less of a need for liquidity and other avenues of liquidity than PIPEs which can be seen as expensive or restrictive. But in a down market where private equity sponsors need to deploy their capital and public companies need the liquidity, this leads to an increase in PIPE transactions like we have seen over the last six months. PIPE transactions are expected to increase by 50 percent dollar value in 2020 over 2029 and this trend is expected to continue into 2021.
Tobin, can you tell us a little bit about the structure in terms of PIPE transactions.
Tobin Sullivan: Yes, absolutely Dan. PIPEs offerings generally are often highly customized bespoke transactions where investment bankers and legal counsel work very closely with both investors and issuers to number one, collect the type of security to be used in the PIPE and number two, to really tailor the economic rights, the governance rights, the legal protection associated with any given PIPE. Now in the current market environment, the type of PIPE security to be used can really run the gammet of anything from a straight forward investment being the issuers common stock to more complex investments in convertible preferred securities to debt arrangements with the issuer whether convertible or not. And ultimately what type of security is selected by the issuer and the investor really depends on a number of factors, maybe most importantly what is the investor's short-term and long-term financial goals. Now, once the investor and the issuer select the type of PIPE security, the investors next turn to what are the economic rights of the PIPE transaction and this might include dividends, interest, downside liquidation preferences, redemption rights just to name a few. Similarly, there are a whole host of governance rights and legal protections that investors must consider. Many investors on the one hand seek forward representation or customary minority investor protection such as preemptive rights such as protective provisions or veto rights, while issuers on the other hand seek to institute standstill or lock up restrictions on investors. Now that’s 50,000-foot overview on the terms and types of security. John, I’ll hand it over to you to talk about how these PIPE transactions are actually implemented.
John Pitfield: Alright, thank you, Tobin. So PIPE transactions are really attractive for both the issuer and the sponsor and they can be done in a very rapid time frame. They are not subject to prior review by the SEC and they are typically structured to also not require stockholder approval. There is an ability to consummate the transaction, get the capital into the company in a very rapid time frame. Tobin hit on this. The real core consideration of the type of security to purchase in the PIPE transaction and that really is influenced by your funds investment characteristic. So, for example, if you are seeking more towards the return of capital, steady-state returns, more debt instruments would be an attractive vehicle for you whereas if you are seeking this as a potential toe-hold investment to take private, you know either purchasing common stock or securities convertible common stock would be attractive. Now two notes for the unweary on purchasing common stock, first 13B disclosure, if you end up with more than 5 percent ownership in the company, thinking ahead, to premature disclosure to take private transactions that could be mandated under 13B would be important. Similarly, if you end up with greater than 15 percent ownership, thinking through the Delaware interested party transaction rules will be also equally important to being successful in the end of take-private transactions.
The three of us look forward to talking with you further about PIPEs at your convenience and look forward to the continued growth of this instrument.
The information presented in this recording is for educational purposes only. It does not constitute legal advice for a specific situation. If you wish to obtain legal advice, you should retain an attorney and explain the facts of your particular situation.