Wednesday, April 1, 2009

Private equity: Would you like to get hit with a PIPE?

April 1, 2009

Private equity: Would you like to get hit with a PIPE?

You may if you are an investor in a public company that does not appear to show any possibility of recovering in your life time! A PIPE transaction is a “private” investment in a “public” company. The private investor purchases shares of the public company at a deep discount via a convertible security such as preferred stock. In many cases these transactions are private placements and do not need to be registered with the SEC.

Small to Mid-sized public companies explore PIPEs when they no longer have access to corporate debt and there is no public market for their securities, but they need money FAST. They are less expensive for the company to float than say a secondary stock offering to the public because of less stringent registration and marketing rules. Sometimes large companies become mid-sized and more often small when credit dries up!

So why shouldn’t they just buy the shares in the open market? Have you ever you’re your penny stock fly when someone just breaths on it? PIPEs allow the accredited investor (ie: Private equity) to acquire a sizeable position at a fixed or variable price verse pushing the stock higher in the open market. The transactions are very dilutive and thus de-value the existing shareholders. If you were a shareholder would you want to have less of a big pie or all of no pie when you see your stock holding slipping into sudden pink sheet death?

A “traditional” PIPE uses equity such as preferred stock issued at a set price. A “structured” PIPE is when convertible debt is issued instead of equity. Structured PIPEs have an obvious benefit of being higher up the flag pole if a company were to be dissolved. Both of these usually have a floating conversion price to protect their position against the “death spiral”.

By lighting up the stove PIPE a public company can recapitalize their balance sheet and do things in bad markets such as buy other companies in similar positions who have not heard of PIPEs. Go capitalism!

Justin Davidson

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Here are a few interesting topics:

- What is the difference between Private equity and Venture Capital?
- What is Mezzanine capital?
- What is convertible debt?
- What is Preferred stock?
- What is a "term sheet"?
- Should I raise equity or debt financing?
- What is an asset based loan?
- What is a Hedge fund?
- Is DIP financing a good thing?
- What is a PIPE transaction?
- Should I use just VC or should I use a blend of the private capital lines? (see right)

Venture Debt - The Other Green Money
5 Reasons Convertible Debt Sucks
Should I raise debt or equity?
The Science & Art of Term Sheet Negotiation
Venture Debt for Startups
Top 10 Tips for Entrepreneurs Piching VCs
Convertible Debt Jeopardy
Preferred Stock Term Sheet (sample)
Finders Fee Agreement (sample)
Private Equity

My ideal target:
- mid-sized company ($20mm - $250mm)
- intellectual property patents
- customers on contract
- maturing revenue
- large available growth market
- low productivity (rev/emp)
- fragmented industry
- high barriers to entry
- lack of organized information systems
- un-organized product lines
- confusing brand value proposition
- poor internal metrics
- low debt structure
- under capitalized
- poor leadership
- limited sales channels
- limited suppliers
- mis-incentivized corporate objectives
- some unprofitable customers

It's hard to improve something that is already perfect.

Are you an accreditated investor looking to participate or a company looking to be saved? Shoot me an email.