Winterman Asset Management has launched its Managed PIPE account to enable investors to become involved in the lucrative, but often inaccessible, market of Private Investment into Public Equity ("PIPE").

What is a PIPE?

A private investment firm's, mutual fund's or other qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPE’s - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares). - investopedia -

The phrase was coined in the US and although  we discuss PIPEs we are more interested in Euro PIPEs i.e private investment in public equity in European listed companies. These are more often referred to as Private Placements, but we shall use the term PIPE throughout as it is a good decription of the type of investments we look at.

What are the benefits to companies?

This financing technique is popular for the companies receiving the finance due to the relative efficiency in time and cost of issuing such investments, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues and there is also no need for an expensive road show, lowering both the costs and time it takes to receive capital.

PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing and need the financing on a timely basis to take advantage of imminent revenue opportunities such as acquisitions, order financing and expansion.

What are the benefits to Investors?

A traditional PIPE would be subscribing to a private placement of equity in the business generally at a discount to the prevailing market price. A company that required finance quickly could go through the process of issuing a prospectus for a secondary offering and doing the rounds in a 'road show' to gain investor interest. There may also be commission involved for brokers. These costs can escalate anywhere up to 35% of the money being raised.

It would make more sense and be a quicker and cheaper process for the company to issue the shares at a 30% (in this example) to the market price to a specific investor. The finance would be attracted quickly and less fees would be paid. Essentially, this is how a traditional PIPE works and it gives investors the opportunity to obtain shares in growing companies at a deep discount to the market price.

In a structured PIPE a company would issue debt that may convert into equity at a price in the future. This has the benefit for the investor of having more security for the investment because typically the debt would be secured on some type of asset or performance basis. Structured PIPE's can take security that, more often than not, banks would not. They can also have security in the issuance of shares, a fixed discount to the market price for example, where should the market price go down, the PIPE has a permanent conversion price at 25% below the market price.

The flexibility is there for the company and of course the risks for the investor vary with the company that is being invested in. The ultimate objective is to obtain shares in a growing company at a discount to the market price,

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