Today, there still exist numerous public companies that are either struggling to finance their existing growth plans or bridge themselves to profitability.  While trading volumes remain attractive for some of these businesses, the secondary offering market has withered as readily available source of growth capital.  This funding gap has lead to the “reinventing” of the relationship between the public and private capital markets.  An increasing number of public companies have turned to alternative forms of financing such as Private Investment in Public Equities (PIPEs), in which publicly traded companies access new capital through the sale of stock directly to a select group of private investors. 

 

Over the past few years, the use of PIPEs has dramatically increased, with PIPE transactions in 1999, 2000 and 2001 totaling close to $50 billion.  However, during the first half of 2002 alone, $8.7 billion was raised.  In addition, over the past two years, over $105 billion of equity capital has been raised by equity funds.  Thus far, this capital has not been deployed to traditional start-ups and emerging businesses, hence a growing need to put this capital to work.  As such, many major private equity funds have entered the PIPE market and the days of “Toxic Convertibles” or “Death Spiral Convertibles” are over.  Major industry categories that are currently targeted include:

 

§         Healthcare,

§         Media,

§         Telecommunications,

§         Global Industrial Services,

§         Business Services,

§         Retail,

§         Computers, and

§         Software.

 

As the markets for PIPEs have improved, the public markets have learned to better interpret the financing vehicles and, as such, the universe of prospective investors has expanded.  In general, an investment by a traditional private equity fund has come to signal: (i) an indication that the company has improved its financial posture; (ii) that smart investors are buying into the Company’s plan; and (iii) reinforcement that the company is undervalued at the current stock price level.  As a result of this interpretation, there is typically a favorable market reaction from the issuance of a PIPE.  For example, in a study performed by CSFB of more than 100 PIPE investments made by traditional private equity funds, concluded:

• Average premium to the prior’s day close was 11.7%, 
• Average premium to the trailing 15-day average was 10.4%,
• Average 1-day stock price increase was 8.0%,
• Average 30-day stock price increase was 12.2%