What it means
When a listed company needs capital, it can run a public offering, which involves a long registration process, a roadshow (a series of investor meetings) and a lot of paperwork. A PIPE deal skips most of that by selling the securities privately to institutional investors such as hedge funds, mutual funds and private equity firms.
Because the sale is private, the terms can be negotiated quickly, sometimes within days. The investors accept a private sale because it comes with a lower price.
A traditional PIPE sells ordinary shares at a discount to the market price, while a structured PIPE sells convertible bonds or preferred shares that can later turn into ordinary shares. The structure may include extra protections for the investor, such as a floor on the conversion price.
The shares sold in a PIPE are initially restricted, which means the investors cannot resell them freely. The company usually agrees to file a resale registration statement within a set period so that the investors can sell their shares in the public market.
Until that filing is effective, the investors carry the risk that the share price may fall. PIPE deals are popular with smaller listed companies that find a public offering expensive or uncertain.
They are also common when a company has an urgent need for cash, such as funding an acquisition or repaying debt. In recent years, PIPE funding has often been paired with mergers involving special purpose acquisition companies, where it gives the deal extra committed cash.
The main drawback for existing shareholders is dilution (a smaller ownership percentage after new shares are issued). A discount to the market price transfers some value to the new investors, and a falling share price after the announcement is common.
Some stock exchanges also require shareholder approval for large private placements. Finance teams assessing a PIPE should compare the cost of the deal with other sources of funding, including bank loans and public offerings.
The true cost is not just the discount but also fees, any warrants (rights to buy more shares) and the effect on the share price. A clear view of how the cash will be used makes the deal easier for existing investors to support.
In practice
Real-world examples.
Example
A mid-sized medical device company needs $30,000,000 to fund a new product launch. Instead of running a public offering, it sells shares privately to three specialist healthcare funds at a 7% discount. The money arrives within a fortnight of agreeing the terms.
Example
A listed software firm agrees to buy a competitor for $120,000,000 and needs extra cash to complete the deal. It raises $40,000,000 through a PIPE deal in convertible preferred shares, which pay a fixed dividend. The investors can convert into ordinary shares if the share price rises.
Example
A small energy company with heavy debts uses a PIPE deal to raise $15,000,000 and repay a loan that is due next quarter. Existing shareholders vote to approve the sale. The company avoids a costly default and keeps its credit lines open.
Formula
Calculation
Gross proceeds = number of new shares x issue price
Discount = (market price - issue price) / market price
Ownership of new investors = new shares / (existing shares + new shares)
A listed company has 20,000,000 shares in issue, trading at $10.00 each. It sells 2,000,000 new shares in a PIPE deal at $9.00 per share. Gross proceeds are 2,000,000 x $9.00 = $18,000,000, and the discount is ($10.00 - $9.00) / $10.00 = 10%.
After the deal there are 22,000,000 shares in issue. The new investors own 2,000,000 / 22,000,000 = 9.09% of the company, and existing shareholders fall from 100% to 20,000,000 / 22,000,000 = 90.91%.Case study
Seen in the real world.
Tidewater Biologics is a fictional drug developer, and this story is illustrative. Its shares traded at $8.00, and it had 25,000,000 shares in issue, but it expected to run out of cash in nine months.
The board considered a public offering but was told it would take three months to arrange and might hurt the share price. Instead, it sold 3,000,000 new shares to two institutional funds at $7.20, a 10% discount, raising 3,000,000 x $7.20 = $21,600,000. The shares were restricted until a resale registration statement became effective.
Existing shareholders were diluted, as the new shares represented 3,000,000 / 28,000,000 = 10.7% of the enlarged company. The share price dipped on announcement but recovered once the funds were used to start a trial. The illustrative lesson is that a PIPE deal buys speed and certainty at the price of a discount and some dilution.
Watch out
Common mistakes.
- Counting only the headline discount and forgetting fees, warrants and the likely share price fall after the announcement.
- Assuming PIPE investors can sell immediately, when the shares are usually restricted until a resale filing is effective.
- Ignoring dilution, which reduces the ownership share and the voting power of existing holders.
Questions
People also ask.
Who buys in a PIPE deal?
Mainly institutional investors such as hedge funds, mutual funds, private equity firms and corporate investors.
Is a PIPE deal the same as a private placement?
A PIPE is a type of private placement made by a company that is already publicly listed.
Why are the shares sold at a discount?
The investors take the risk of holding restricted shares and want compensation for that risk and for providing money quickly.
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