As a seasoned investor you may be tempted to consider PIPEâ€™s for your next investment venture, or to include in your portfolio. Here is what you need to know.
PIPE investments are when a seasoned investor or institution such as investment firms or mutual funds opt to buy public company shares directly from the company, at below current market value (CMV) prices.
Companies usually decide to either issue new stock shares, or use some of their existing stock to sell through PIPEâ€™s, in order to fund more regular activities such as day-today operations, expansions or even acquisitions. The shares are sold though a private transaction and never gets listed on the stock market.
This can be a very lucrative and fast method of generating capital for a company, because of the ad-vantages if offers the company and its potential investors.
From a public companyâ€™s point of view, PIPEâ€™s have the advantage of enabling it to raise money faster compared to sales on capital markets. Money can be available in a couple of weeks, compared to tra-ditional processing times taking a couple of months.
Less stringent regulations also means that less time and money is spent on processing these sales, which is great for companies needing a quick monetary injection. Unfortunately, PIPEâ€™s do effectively bring in less capital than CMV sales, and can dilute the current stockholders stake (Source).
For investors, PIPEâ€™s have the advantage that they can buy more stock for the same monetary value than public offerings because of the lowered price.
PIPEâ€™s were originally designed to aid small to mid sized companies that may struggle competing on capital markets, and are in need of a quick financing option. Although these are not the only companies that use PIPEâ€™s they are the ones that can best benefit from this stock sales structure.
If a larger, better known company opts to buy the majority or even all of the PIPE shares, a business relationship is formed that can aid the developing or smaller sized business though associa-tion as well as financially.