Opportunities in the pipeline
It has been another remarkable year for the private investment in public equity (PIPE), a structure that has continued to gain in stature and application as economies on both sides of the Atlantic, and indeed around the world, face new challenges and competition for capital and investment opportunities. PIPE issuance has played a critical role fuelling the growing global economy and should continue to create significant opportunities for forward-thinking issuers and investors.
These privately negotiated, equity-linked securities issued by public companies to one or a group of sophisticated investors became popular initially because of their promise of rapid and liquid financing. The security gained notoriety during the tech boom, with a reputation that soared then crashed alongside the Nasdaq.
PIPEs have since enjoyed a resurgence due largely to investor
maturation and growing demand. Now recognised for providing
efficient capital, reputable investors and reliable funding, the option of PIPE financing is becoming a mainstay in most dynamic economic landscapes.
The most dramatic development is the extensive use of PIPEs in what had been effectively unexplored territory. Overwhelming demand and increasing sophistication from Asian and emerging markets has led to remarkable deals of the past year not just across borders but overseas.
One noteworthy example was the purchase of IBM’s personal computer business by the Hong Kong-based Lenovo Group, funded through a $350m (e281m) convertible PIPE into Lenovo by three private equity firms, Texas Pacific Group, General Atlantic Partners and Newbridge Capital, representing a 14% stake in Lenovo.
Another example is the Rs140 crores (€26m) PIPE recently announced by the largest private sector shipyard in India, Agarwal Business Group Shipyard (ABG), led by firms based in Hong Kong, Singapore and India.
The ABG deal underscores the vast opportunities available for private equity firms in emerging economies, with $150bn needed over the next decade from foreign investors for infrastructure in India alone – a point stressed by Indian prime minister Manmohan Singh during his September visit to the New York Stock Exchange.
Growth in the more traditional PIPE strongholds was consistent. The US continued to see strong PIPE activity this year, with over 400 deals totalling $5.3bn during the first quarter, representing slightly less volume but a 6% rise over the $4.9bn raised the previous quarter.
High energy prices again allowed the energy sector to dominate PIPE issuance. Energy companies issued 38 PIPEs during the first quarter for a total of $656m, slightly bettering the previous quarter’s 36 deals totaling $639m. Endbridge’s $125m offering in February was one of the largest energy PIPEs ever.
A significant development in the US has been the fall in biotech PIPEs, reflecting the biotech sector slump. The first quarter saw roughly half the volume on last year. However, the reduction has been mitigated by strong activity in other sectors.
Scrutiny by the Securities and Exchange Commission (SEC) has continued. However, as previously suggested in these pages, the agency seems less focused on obstructing PIPE issuances than on regulating the larger hedge fund industry.
In December, it finalised a rule requiring hedge funds with short initial lock-up periods to register with the agency by February 2006 and be subject to oversight under the Advisors Act. With initial lock-up periods typically under two years, it is expected that many fund managers specialising in PIPEs will have to register with the agency.
Compliance with the Act will certainly cause headaches for some managers, but it seems unlikely PIPE issuance will be significantly affected. To the contrary, the recent departure of both former SEC chairman William Donaldson and chief of enforcement Stephen Cutler could encourage greater PIPE activity during Bush’s second term.
The resignations of the two who had reputations for tough enforcement and activism might signify a more business-friendly environment in the US. Donaldson, who oversaw a record number of enforcements and $7bn in fines since 2002, makes a sharp contrast to his successor, Representative Christopher Cox, a business sympathiser with a long history of supporting deregulation initiatives.
Whether this SEC shift will result in less PIPE scrutiny and more PIPE deals remains to be seen. However, it seems reasonable to assume that in the US, PIPEs will continue to move towards becoming a common financing option used by issuers and investment houses.
It is notable that an Investment Dealer’s Digest article from May was titled: ‘The PIPEs makeover; a financing instrument for the desperate gains a new sheen of respectability’. The article quoted Christopher Wood, a British surgeon and chief executive of New York-based pharmaceutical Bioenvision, speaking of his firm’s $35m PIPE, stating: “It’s been our lifeline.”
Also significant was Deutsche Bank’s recent expansion of its PIPEs practice with the hires of several new executives. It’s head of equity capital markets said: “The private placement and PIPE markets are increasingly important sources of capital for growth companies... and the PIPEs_group... will enable our clients to identify alternative capital sources and take advantage of growing opportunities in the private equity markets.”
In Europe the participation of both investor and issuer in European PIPE activity has continued to grow. The growing allure of PIPEs can be seen in recent high profile deals, such as Thomson’s $500m convertible bond issue to US firm Silver Lake, or the portion of Bull’s €44m recapitalisation partially financed through a PIPE issued to Artemis and an Axa fund. Another arresting PIPE issuer was Escada, which in 2003 used the vehicle to facilitate an investment by private equity firm HMD of €40m of fresh equity into the German fashion house.
Two forces are driving strong growth in the European PIPE market. First, on the issuer side, the expanding European economy has increased capital demand for cross-border financing for both infrastructure, as less developed EU nations catch up with more advanced peers, and growth, as “old” Europe grows more competitive in fields such as biotech and technology. The PIPE is an efficient and speedy vehicle for meeting these cross-border needs
From the investor side, an abundance of private capital and pressure from an increasingly competitive market has caused traditional private equity firms, such as those in the venture and buyout business, to shift from their customary focus and aggressively pursue PIPEs and expand their presence abroad.
In past decades, high local demand meant European private equity could be deployed with little difficulty. However, the situation has reversed and nearly €40bn of capital is awaiting deployment in Europe. This excess of supply, in addition to factors such as the rise of auction sales and readily accessible information, has done away with the privileged deal and brought greater competition for each investment opportunity. Funds wishing to distinguish themselves need to pursue new and creative models for success, as illustrated through increased interest in large and notable PIPEs.
With a surplus of investor capital and growing conversance with PIPEs, Europe seems well positioned to grasp these domestic and international opportunities.