Private Investment in Public Equity - PIPE

  

See: Private Investment Fund.

It's caled a PIPE. And a lotta people smoke it.

You put mayonnaise on everything. You spread it on your bagel in the morning (you think people who use cream cheese are gross). You put it on salads. You like to snuggle on the couch at night and just eat mayo out of the jar with a spoon while binging Netflix. When you go to your local grocery store to buy mayo, you don't just pick up a jar at a time. You buy it in bulk. Instead of spending $0.40 an ounce by purchasing the little jars, you end up paying just $0.25 an ounce by getting the giant pack...the one where they need to get the forklift ready to help you take it to the car.

Bottom line: when you buy things in bulk, you get a discount off the publicly advertised price. That's the basic dynamic behind a PIPE.

It works like this: you have an already-trading public company. Shares change hands on the NYSE or NASDAQ everyday. But then a private investment firm wants to buy some shares. A lot of shares. Meanwhile, the public company wants to sell shares. Remember: the stock that trades on a public exchange was sold by the company a long time ago. The firm itself doesn't see any money from the deals that go down on the NYSE or NASDAQ. If the firm wants to raise more cash, money it can use to invest in its business, it needs to sell more stock. That usually involves a secondary offering, which can be a hassle. However, if it sells a big chunk of stock in one shot to a private investor, it saves a lot of trouble. It gets an inflow of cash, and the private investor gets the shares they want. In exchange, the public company offers the investor a deal. It sells the shares below the current market value. The big investor gets the stock at a price less than they'd have to pay if they bought it in the public market. Basically, they receive bulk pricing. And the company gets an injection of cash, which it wouldn't get if the investor had purchased the shares on the open market.

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Finance: What are Five Questions You Can...4 Views

00:00

Finance allah shmoop what are the top five questions you

00:05

can expect to be asked in a private equity investing

00:09

interview All right people first things first before you walk

00:13

into the interview well you've checked out the company's website

00:16

right You've looked at their history the companies they've invested

00:20

in and then googled the crap out of those companies

00:23

Right Then you've looked up on link thin in quasi

00:26

stalker like fashion each of the key partners of the

00:30

firm right and especially the people you're meeting with and

00:34

of course you've jotted down the random connections like wealth

00:38

one was also a nationally ranked squash player And be

00:41

sure you note that this is very different from your

00:44

grandfather who was a nationally ranked squash grower very different

00:48

i don't want to hit those things explode all right

00:51

So this is the very basics but more importantly you

00:53

have to know whether it is actually a real private

00:56

equity investment company the old school way or if it's

01:00

really a growth capital investment company and they're huge differences

01:04

and you've got to know the diff so before you

01:06

go in all right well in the olden days private

01:08

equity was all about finding fallen angels cos who used

01:13

to be vaunted respected loved and growing Then for whatever

01:17

reason demand suddenly changed Hi newspaper industry or its management

01:22

did stupid things like tick off its distribution retail partners

01:26

Hello coach luggage We're looking at you or the brand

01:29

itself while just got tired Hi Adidas or adi das

01:33

is they say today and the stock went from trading

01:35

at twenty times even toe like five times as wall

01:38

street fell out of love with company Well private equity

01:42

investors back then would borrow a whole heap of cash

01:45

and take the company private with a mindset of fixing

01:48

it and then taking it public using higher profits to

01:52

pay down debt and return the company to growth so

01:55

that it would carry a multiple a whole lot closer

01:57

to the twenty times it carried when people loved it

02:00

Then the five times it carried when you bought it

02:03

so that's private equity old school growth capital is something

02:07

very different Growth capital is just money already healthy companies

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need thio grow maur if whatever dot com had another

02:15

one hundred million dollars in cash well then it could

02:18

Open No china Yeah china And then wow if everyone

02:22

in china just bought one thing on whatever dot com

02:25

well then wow The company would add eight billion dollars

02:28

in profits to its bottom line so i could really

02:31

use that hundred million bucks That's growth capital growth capitals

02:35

Totally different Animal there's no debt no turn around No

02:38

failed company no firing of half the workforce and redoing

02:43

the union contract It's just about investing for growth at

02:46

some price Got all that All right So here we

02:49

go Five questions managed to not change one What investments

02:53

from the industry have you liked or at least followed

02:56

Answer Well you'd better have followed a few They're not

03:00

necessarily going to ask you for specifics but it'd be

03:03

fair if they had a big fat high profile winner

03:05

in their portfolio and then they asked you about it

03:08

at least asked what you thought of it The deal

03:10

company product and the answer there You loved it genius

03:14

Such insight So this is how and where i want

03:18

to learn blob blob Blob of law in private equity

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with puckering and tongue Yeah All right Next question welkos

03:25

Through the math of private equity there Okay so not

03:28

technically a question but here you might start blathering about

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debt to even ratios and valuations of wildly optimistic internet

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companies and you'd have scorn and guffawing and then you'll

03:39

realize that they were talking about their own compensation You

03:43

know how they charge their limited partner investors and what

03:46

carrier profit participation means to the partners their golden goose

03:51

or peace and their three homes and second set of

03:54

spouses or spice or whatever it is And families Yeah

03:57

so you've got to know how private equity it's paid

03:58

in two and twenty two percent fee twenty You gonna

04:01

carry generally Alright next number three what's gonna be your

04:05

industry We're talking like davey on that hill cartoon Alright

04:08

if you've made it this far well then you already

04:10

have some area of expertise right You're a semi young

04:14

guru of banks or retail buying called amazon or tech

04:19

or argentina How about drug distribution The legal kind Hopefully

04:24

this one since your notionally an expert in it will

04:27

be an easy answer You've followed the industry for at

04:30

least three years and got a check plus on your

04:32

final homework assignment Yeah congrats there Just remember that the

04:36

guy sitting across the table from you has probably followed

04:39

that industry for thirty years knows every ceo and their

04:43

secret lovers and also got a check plus on their

04:46

final homework assignment Yeah so take that All right moving

04:50

on for so much Do you want to work Answer

04:52

lots Whatever you need Anything you name it i take

04:56

fully caffeinated i'll be there sweep the leg whatever it

04:59

takes That's the answer got it Five why not public

05:02

equity While public equity is about nerve like it's just

05:06

a sense of where the danger lurks from where the

05:08

opportunities are where the big fat drafted you could kill

05:11

and eat for a month Private equity is all about

05:14

muscle You can't brute force your way tio picking amazon

05:18

overseers in nineteen ninety seven there's just a gut feel

05:21

that public market investors get where they have access to

05:25

scant data and very little knowledge that is direct to

05:28

actually go on regulation fd or full disclosure requires companies

05:33

to basically disclose little more than their quarterly reports and

05:36

the name of their company anytime asked private equity however

05:39

Has essentially no regulation So when you invest in it

05:43

well you get every detail you'd ever want And through

05:46

sheer force and will of doing amazingly detailed quality research

05:51

talking to every vendor and every supply heart person and

05:55

union factory workers and secretaries and on and on and

05:58

on a private equity deal may not be one hundred

06:01

eggs return but very few of them go big time

06:04

bus the way public stock to do all the time

06:07

and your temperament is simply set more for muscle in

06:10

lots of hard work than it is for nerve And

06:13

you know sensing the way the wind is blowing you

06:16

know the way the innkeeper and lame is Rob does

06:18

like that All right well there you go You're all

06:20

set for your interview and most importantly don't forget the 00:06:24.045 --> [endTime] tanaka close quarters there

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