PIPE Deal

  

Categories: Investing

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 equity?4 Views

00:00

Finance a la shmoop what is private equity?

00:06

well there's public equity that's this stuff companies who IPO'd

00:11

they're listed on NASDAQ and the New York Stock Exchange and the London Stock [London stock exchange building appears]

00:16

Exchange and a bunch of others so if that's all the public equity you know

00:20

equities anyone can invest in... i.e open to the public see the catchy name there

00:25

then what's private equity hmm well it's private in part because not just anyone

00:32

can invest in it in most cases investors have to be "accredited" to

00:38

be able to invest in private equity and that just means that they've signed [Person signs document]

00:42

letters stating that they are big boys and girls and understand that there is a

00:46

whole lot of risk in what they are investing in and if you're out house

00:50

cleaner business dies well then they won't sue the managers for losing all [Man drops window cleaning product]

00:55

their money well structurally what makes a private

00:58

equity deal private instead of public well private companies are typically

01:02

much smaller than public ones their needs for capital are much lower so they

01:07

only need to tap a select group of usually wealthy investors rather than

01:12

massive pools of capital available in the public markets there are generally

01:16

two types of private equity in real life practice the first is what's called

01:21

growth equity which is really just late stage venture capital rounds put into [Growth equity explained on 100 dollar bill]

01:26

companies a relatively short time before an expected liquidity event ie an IPO in

01:32

a growth capital deal a high-growth tech company might be raising 50 million

01:37

dollars at a 250 million dollar pre-money valuation believing it can go

01:41

public for five hundred million dollars in two years later well this type of PE

01:46

deal is just a standard equity investment buying a good sized sliver of [Person places pie on floor]

01:52

ownership pie in you know outhouse cleansers dot-com...

01:58

well the other type of private

02:01

equity deal structure is one form or another of a leveraged buyout that is in

02:05

the second type of private equity deal the target for the buyout is usually a [Stock value rising on company stock value chart]

02:11

company who used to be good but then fell you know like that so a private

02:15

equity firm might buy old crappy purses.com for two billion dollars putting in

02:22

five hundred million of equity from their own coffers but then borrowing one

02:26

and a half billion bucks from kindly loving banks well the hope or belief

02:31

then is that the PE firm by leveraging geniuses they court to help them fix [Man holding bunch of flowers to woman]

02:36

broken companies like this one will be able to turn that purse frown upside

02:41

down add some cool tech to it like biometric purse opening and GPS tracking [People place biometric and GPS devices on a purse]

02:48

and how about heated handle things how about that that's tech

02:53

right and then three years after having taken the company private like it used

02:57

to be public they lever up, bought it took it private then they fixed it well

03:01

then the PE firm hopes to take it public again for four billion dollars turning

03:06

their 500 million equity stake into a value of some two and a half billion

03:10

dollars after paying back the one one and a half billion dollars in loans or

03:15

plus interest and all that that they took out to buy it in the first place

03:18

right to make five times your money in just a few years that's a really good

03:21

deal in reality it's financially a whole lot more complicated than this but well [Man with maths formulas floating in the background]

03:26

no more complicated than this purse has become.....

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