Private Investment in Public Equity.
Huh? What is this? Well, you have a company who has stumbled. They think that, if they can just grow their ferret-breeding division, their gourmet coffee bean margins will grow dramatically and everything's gonna be all right. But their equity or stock is in the tank, trading at a crazy low multiple. So it'd be very dilutive to sell shares to raise cash. And because the company is breakeven and on dicey ground, no banks want to lend them money.
The answer: the private markets, even though this company is public. In fact, one brave venture capital firm wants to buy a convertible note from the company that acts like debt if the company doesn't perform, i.e. they have to pay back the VC a reasonably high interest rate, or the VC owns the company. Or...the investment converts into stock priced 50 percent higher than where the company is trading today, i.e. not as diluative as just selling shares today.
That's the notion of a PIPE, wherein a private company makes a private investment in a public company, usually revolving around a conversion feature into their equity. And let's hope that the hope for those ferrets wasn't something the CEO was putting in a PIPE and...smoking.
Related or Semi-related Video
Finance: What is private placement?5 Views
finance a la shmoop what is a private placement okay a placement means that a [Man discussing private placement]
company is placing its shares with some new owner in return for cash that is
it is placing ownership in return for capital so what's the most famous type
of public placement all right come on spell it come on with me now yes IPO so
if that's a public placement it's private kiss and cousin private [People in a car cuddling]
placement is almost the same thing all be it with fewer rules about disclosure
and structure and a bunch of other regulatory stuff in fact a private
placement is also called a regulation D placement...Such that
securities are not registered with the state or the SEC the way they would be
in a public offering in a public offering securities can be sold to [Group of people in public securities]
pretty much anyone who has the dough to buy the shares and is qualified...
....No restrictions or requirements
because the government's done all the filtering but in a private offering the
Securities can only be sold to what is called accredited investors that is
investors sign a piece of paper that warrants and represents that they're [Wealth verification document signed]
wealthy enough to lose all the money they're putting into this investment
like they have over a million bucks in assets and a few hundred grand a year or
more and education and all that and that they're smart enough to have known not
to do this investment in the first place should things go awry think no training [Boy riding a bike]
wheels, no railing, no ambulances or cops or firemen you're on your own here in a
private placement there baby and yeah good luck [Man sitting by a bus stop and bus arrives]
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