Usually, private equity firms take control of firms which are privately held, and tend to act hidden. But, in recent years, the rising phenomenon of private investments in publicly listed companies, so-called PIPEs, could be observed. At first, this seems to be inconsistent but, it could become a perfect way to generate good returns. This book gives an overview about the PIPE market, and then focuses on the role of private equity funds. How do they invest in publicly listed firms? And what are their motivations? Is the overall performance of PIPE deals superior to those of traditional private deals? PIPE deals have much in common with typical venture capital deals with regard to the young and high-risk nature of target companies, and the minority ownership position. Surprisingly, buyout funds are relatively more engaged in PIPEs than venture funds are. The author analyzes deal sizes, industry sectors, holding periods, IRRs and multiples of public deals, and comparable private deals with a unique data sample on transaction level. Finally, he discusses other possible motives for private equity firms to engage in these deals: improved liquidity, fast process of deal execution, access to certain markets, avoidance of takeover premiums and the thesis of an escape-strategy for surplus investment money.

Textprobe: Chapter 4.4, Characteristics of PIPE deals compared to traditional PE deals: 4.4.1, Acquired ownership: An analysis of 457 deals in the Zephyr database (see Appendix H) shows that on average PIPE issuers give away about 19.4% of their equity ownership in a single PIPE transaction the median is 13.5%. As the histogram in Appendix H shows, PE investors seldom acquire majority ownership in a PIPE deal. The great majority of deals are below 20% acquired ownership. In fact, only 7.7% of the analyzed deals are majority takeovers (acquired equity stake >= 50%). 92.3% of all transactions are minority deals (acquired equity stake < 50%). This finding is consistent with other studies which report that PIPE deals usually are minority deals. Dai (2006) finds a 22% average fraction of outstanding shares acquired by PE investors (17% median), which is in a very similar range as the results above. But as Dai (2006) further describes, PE investors tend to acquire larger ownership stakes than other investor types. She reports that for hedge funds the average fraction of equity bought is about 12.1% (median 10.6%). Meidan (2006) describes an average fraction of the company sold between 11 – 16% for his sample of 1,726 common stock PIPE transactions. Hillion and Vermaelen (2004) report an average issue size relative to market capitalization of 13.1% (median 9.3%). One reason why most PIPE transactions stay below 20% ownership might have to do with stock exchange regulations. If a company listed on NYSE or Nasdaq sells more than 20% of its outstanding common or voting stock at a discount to the trading price, then generally stockholder approval is required (Short & Lebovitz, 2008). As this regulation creates an expensive and time-consuming hurdle, most PIPE issuers are likely to stay under this threshold. A higher ownership percentage might also hit regulatory thresholds for a mandatory takeover offer, which is not intended by most PIPE investors. Although PE funds acquire more equity stake than other PIPE investor types, the acquired ownership in absolute terms is small compared to typical buyout deals. In order to test whether the difference in equity ownership between PIPEs and traditional PE transactions is really significant, the author analyzed traditional PE transactions from the Golding database. In order to construct a sample which is comparable to the deals in the Zephyr database, only deals closed within the same time span were chosen. Selecting the transactions for which the acquired ownership was given lead to a final sample of 940 traditional PE transactions. The sample consists of 118 venture capital deals and 822 buyout deals with an initial investment between 1996 and 2006. The analysis of these traditional PE transactions shows that the mean acquired ownership of a single PE fund is 44.0%. This is way more than the 19.4% in the sample of PIPE deals. A t-test reveals that the difference is highly significant. But one has to be careful in drawing early conclusions from this result, because the test sample is heavily influenced by the high number of buyout deals. The comparative analysis becomes more meaningful when traditional buyout deals and venture capital transactions are analyzed separately. For the selected 822 traditional buyout deals from the Golding database an average acquired ownership by one PE fund of 47.2 % (median 43.6%) can be observed . Chapman and Klein (2009) report an average PE firm equity stake of 55.8% in their analyzed sample of 288 US buyout transactions, which is in about the same range. For venture capital deals, however, the result looks much different: The 118 venture deals in the Golding database sample show an average acquired equity stake of only 21.9 % (median 16.5%). This is only little more than the average of 19.4% in the PIPE sample. A t-test shows that there is no significant difference in the means. These results have interesting implications. PIPE deals involve indeed significantly less equity ownership than traditional private equity if compared to classical buyout deals. If PIPE deals are compared to typical venture capital transactions, the level of equity ownership is in about the same range. And there is some indication that PIPEs must rather be seen as venture deals than buyouts: As described above the typical industry sectors, the high risk nature of the business and less reliance on leverage in PIPE deals are characteristics similar to venture capital deals. This argumentation has also been brought forward by Ellis and Twite (2008). A popular criticism of PIPE deals is that they do not take majority positions and thus were not able to exercise significant influence. This might be true for the typical buyout fund, but for a venture capital fund this argumentation does not hold, because they usually do not have majority rights in their private investments as well. 4.4.2, Follow-up financing rounds: PIPE deals are an instrument of follow-up financing after the IPO. So, a common hypothesis is that these companies should have been in contact with institutional investors before. An analysis of Thomson ONE Banker data (3,533 PIPE deals by PE investors in 1998 – 2010) confirms that in most PIPE transactions there have been PE investors in the company before. As can be seen in Appendix I, for only about 34% of the transactions the PIPE investment is the first financing received from a PE funds. For 19% it is the second PE financing round, for 12% the third PE financing round and for 35% it is even the fourth or more follow-up financing by PE investors – however it cannot be told from the data sample how often the same investors were involved. Traditional PE investments more often constitute the first PE financing round (46%). Only about 10% of the traditional PE deals have had five or more investment rounds before for PIPEs this figure is about 17%. The difference is statistically significant. This finding was expected because many PIPE issuers must have received start-up financing by a PE fund before, which eventually exited through an IPO. Furthermore, a PIPE can be an ideal instrument for existing investors to ramp up their equity share or to provide their portfolio company with fresh money. An analysis of follow-on financings in the Zephyr database shows, that out of the 835 deals in the sample, 84 deals (10%) were indeed follow-up financings, i.e. one investor invested at least twice in a PIPE issuance of the same company. So it can be reasonably assumed that in general many PIPE investments are follow-up investments by the same PE firm.

• Private Investments in Public Equity

• minority shareholding

• PIPE market

• capital deal

• buyout fund

• finance

• economy

Bernhard Särve absolvierte ein berufsbegleitendes Studium der Betriebswirtschaft in Regensburg und arbeitete anschließend drei Jahre lang im Finanzbereich eines großen Industrieunternehmens. Während seines MBA-Studiums an der Handelshochschule Leipzig (HHL) legte er seinen Schwerpunkt auf die Bereiche Corporate Finance und Private Equity. Von 2010 bis 2012 arbeitete er in der Private Equity Branche und konnte dadurch seine praktischen Erfahrungen auf diesem Gebiet vertiefen. Heute ist der Autor als selbständiger Unternehmer tätig.