Fast Stock Placement: When It Makes Sense for Companies to Go Public Using a PIPE Transaction | message
• It is therefore primarily worthwhile for SMEs
• Private placements remain unaffected by the mood on the stock market
The main purpose of an IPO is to raise capital, which the respective company usually uses to finance new projects. A classic initial public offering is often a so-called IPO (Initial Public Offering) process, with which shares are placed on the stock exchange or offered to interested investors for the first time.
PIPE transaction vs. IPO
However, an IPO procedure is not the only way for companies to put their own shares on the stock exchange. For example, there is also an alternative form of financing with the help of a PIPE transaction. PIPE is the abbreviation for Private Investments in Public Equity. In the financial world, this term refers to the private placement of shares in the share capital, such as common or preferred shares.
In contrast to a classic IPO, the shares that are issued via a PIPE transaction are not offered for free trading, but are only offered to a manageable group of investors. The respective company therefore only addresses investors specified in advance and thus waives the public offer of its own share certificates. Correspondingly, with such a procedure, possible existing shareholders will not receive any subscription rights for the new shares.
An IPO in a fast run
The PIPE procedure has its origins in the USA and is part of common stock exchange practice there. Many American companies especially appreciate the uncomplicated one
Process of such a transaction. Because while the specifications and regulations for a conventional IPO are quite high, the issue via PIPE is only subject to relatively manageable requirements. As a rule, a PIPE transaction can be carried out many times faster than a classic initial public offering.
The time frame for a PIPE transaction is only between 30 and 120 days. The due diligence, which investors usually start around a week after the preliminary negotiation phase, can be completed within two to three weeks. After swiftly negotiating and signing the respective contracts, the final issue can take place after just four weeks.
For such companies …
A private investment in public equity is usually sought by so-called SMEs, i.e. small and medium-sized companies that often operate in very capital- and research-intensive industries. The issuing companies therefore often come from the fields of technology, pharmacy, biotechnology and medical technology. Due to their manageable size and mostly very poor analyst coverage, these companies often have very little chances on the public capital market.
PIPEs can be used to support companies that have no other financing alternatives. Because even for traditional outside capital or a bank loan, companies have to provide the necessary collateral, which is not always available at a very early stage.
… or investors, a PIPE procedure is worthwhile
As a result, companies that issue their shares with the help of a PIPE transaction are only suitable for very risk-conscious investors such as private equity funds, venture capital funds and hedge funds. Because private equity funds in particular usually pursue a very long investment horizon and have a high level of expertise in this segment. In addition, such funds often exert direct influence on the management of the respective company and, following participation, claim a seat on the board of directors or in the management.
However, PIPEs have long been interesting not only for long-term investor groups, but of course also for more short-term speculators such as hedge funds. However, their investment decision is not necessarily based solely on a comprehensive due diligence, but often on factors such as the bid-ask spread or the expected volatility.
Benefits of a PIPE transaction
For small and medium-sized companies, there are numerous reasons in favor of a PIPE procedure. The due diligence effort is relatively low, which saves considerable costs. Furthermore, the respective
Companies have various marketing costs due to the very limited number of investors. In addition to the lower transaction costs, the rapid processing of the capital market procedure also speaks in favor of this type of issue. In this way, a company can collect fresh capital and invest in new projects within a few weeks.
In addition, due to their hybrid structure between private placement and public placement, PIPEs are characterized by their relatively stable form of financing. Accordingly, they often remain unaffected by the public mood on the capital markets.
In addition, due to their very flexible design options, PIPEs offer a large number of companies that could not gain a foothold in raising capital.
Disadvantages of issuing via PIPE
However, the numerous advantages of PIPE transactions are also offset by some serious disadvantages. For example, raising capital by means of a PIPE procedure is often very expensive for the respective company, as the rights granted to investors are often considerably greater than on the public capital market.
Regardless of this, very short-term PIPE investors can trigger considerable selling pressure relatively quickly, which can quickly become a significant problem due to the manageable number of investors. In addition, issues via the PIPE process often have a very negative signal effect on capital market participants, since the very fast processing is generally considered to be inadequate. Accordingly, PIPEs have a rather dubious reputation, especially with conservative investors.
Pierre Bonnet / Forex-news.com.net
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