About $2.2 billion of capital was
committed to the market for PIPEs (private investment in public
entities), securities normally issued by small-cap public companies,
during the first quarter, according to PlacementTracker.com, a
division of San Diego investment banking and research firm DirectPlacement.com
PlacementTracker.com said the capital was committed in 167
separate PIPE deals. While that is down from the more robust 375
PIPE deals in the comparable period last year, which raised $8
billion, it compares favorably with the handful of companies that
accessed the IPO market, said the firm.
"The PIPE market emerged in the first quarter as the leading
provider of equity capital for small-cap and mid-cap public
companies," said Brian Overstreet, president of
DirectPlacement.com. He added that the appeal of the PIPE market is
that companies can raise capital in as little as 30 days versus the
month-long road shows required for initial public offerings.
By contrast, only 20 companies accessed the IPO market, although
they raised $7.9 billion, according to CommScan/Computasoft
PIPE securities are normally issued by public companies with
market capitalizations of less than $1 billion, generating proceeds
of $25 million or less. The majority of PIPE offerings have been
conducted by public companies in cash-dependent high-tech or biotech
Especially in the telecom sector, PIPE investments of private
equity firms have not performed well. As the stock of public market
telecoms tanked, their stock prices sank below the conversion
trigger of the convertible preferred instruments held by many
private equity firms, essentially putting the investments under
PIPE offerings typically take one of two forms, either
"traditional" or "structured" instruments.
Traditional PIPEs usually include the sale of the issuer's common
stock to an investor at a specified discount to the current market
price, or the sale of a security that converts into the issuing
company's common stock at a fixed rate that can include warrants.
Traditional PIPE investors typically include pension plans as well
as venture capital groups and private equity firms.
Of traditional PIPE offerings, 117 were completed in the first
quarter to total $1.1 billion.
Some recent traditional PIPEs include Auspex Systems Inc.'s
$90 million sale of discounted common stock, Learning Tree
International's sale of $141 million of discounted common stock
and United Therapeutics Corp.'s $143 million sale of
discounted common stock.
Structured PIPEs tend to be more complex, taking the form of
convertible debentures, convertible preferred stock, common stock
with resets, or structured equity lines, including warrants. A reset
provision within a structured PIPE gives the investor the right to
reset the initial conversion or purchase price to a discount to the
market price at the time of the reset, offering protection against a
down market. A "toxic" effect for issuers can occur when a
structured PIPE allows an investor to receive common stock at an
ever-increasing rate while the company's common stock price is
Recent structured PIPE offerings include eToys Inc.'s sale
of $100 million of convertible preferred stock with attached
purchase warrants; MicroStrategy Inc.'s sale of $125 million
of convertible preferred stock; and Quokka Sports Inc.'s sale
of $76.9 million convertible promissory notes with attached purchase
In the first quarter, 50 structured PIPE transactions amounting
to $1 billion were completed. Some 41 of those were structured
equity line investments, with nine floating-price or reset-price
convertible PIPE offerings.
The structured equity line commitments include an agreement by IGEN
International Inc. to sell up to $60 million of common stock to
one institutional investor.