What is a Private Investment in Public Equity (PIPE)?

PIPE (Private Investment in Public Equity) is a term commonly heard in the finance world, yet few understand what it really means. This article will give a comprehensive overview of what a PIPE is, reasons for doing a PIPE, advantages, and disadvantages of PIPE along with few transactions as examples.

PIPE refers to any private placement of securities of an already-public company that is made to selected accredited investors (usually to selected institutional accredited investors). In layman’s term, private investors buy shares via a private placement in return for ownership of the company, while the company receives financing from it. This financing technique often allows private investors to acquire publicly traded securities at a price typically below market value.

Why do companies opt for PIPE?

PIPE enables companies to receive and access to funding at a faster pace compared to traditional public offerings which involve extensive regulatory requirements. This type of funding can resolve the company’s immediate liquidity issue and improve its financial position. Additionally, PIPE’s terms are more flexible as they can be tailored according to investors’ preferences, often allowing more favorable conditions for investors which increases the likelihood of securing financing.

Advantages

1. Lower issuance cost
   1. PIPEs can typically be negotiated privately with investors and can be done without a bank. This saves up extensive marketing costs, underwriting fees and administrative fees compared to traditional offerings.
2. Flexibility in financing
   1. PIPEs can be tailored towards investors’ conditions, making it more appealing to investors and increasing the likelihood of success.
3. Speed and efficiency in financing
   1. Unlike traditional financing methods, PIPEs allow companies to sell shares directly to investors without having to go through the usual process of registering with the government.
4. Strategic alliances
   1. The participation of accredited investors could bring strategic partnerships, strengthening and benefiting the company’s capabilities.

Disadvantages

1. Dilution of shareholdings
   1. PIPE transactions involve the issuance of new shares, which results in the dilution of existing shareholders’ ownership. It is important to note that this dilution is a common characteristic of any financing method involving the issuance of additional equity.
2. Impact of share price
   1. PIPE transactions are often issued at a discounted price, which may create a signaling effect in the market. This can potentially lead to investor concerns and increased selling pressure on the stock.
3. Market perception towards the company
   1. PIPE transactions can sometimes be perceived as a sign of financial distress, indicating challenges in securing funding through traditional means. This may result in negative investor sentiment and impact on the company’s market reputation.

Notable successful PIPE Transaction

ORIC Pharmaceutical (ORIC), secured a PIPE funding of a total of $125million on 23^rd January 2024 led by several investment firms including Viking Global Investors and Frazier Life Sciences to fund research and development of their product. ORIC’s Stock price did not tank but pumped after the announcement because the transaction was backed by strong accredited investors that aligned with their long-term goals. The transaction not only strengthened their cashflow position to fund operations into late 2026 but also provided a positive signaling effect towards the market.

A successful PIPE transaction advised by ARC Group

In March 2023, Apollomics, a clinical-stage biopharmaceutical company completed a business combination with Maxpro Capital Acquisition Corp (JMAC) to list on Nasdaq Capital Markets under the symbol “APLM”. This successful business combination came through with a successful PIPE of $23.65 million from a Taiwanese family office and this transaction was advised by ARC Group.

The PIPE not only provided additional capital for APLM to advance its pipeline of drug candidates, but it also helped APLM to get listed on the public market. This enabled APLM to get access to the secondary market for liquidity and further financing opportunities, fostering future growth and development of the firm.

In summary, public companies can benefit from PIPE financing as a substitute for traditional public offerings. It offers flexibility, quick access to finance, and the possibility of strategic alliances. Despite the underlying disadvantages, which include dilution of shareholders and issues with market perception, PIPEs are nonetheless an essential tool for businesses that want quick finance or want to fortify their capital structure. The benefit of aligning with reputable institutional investors to reduce potential drawbacks and boost market trust is highlighted by the successful PIPE transactions. Through a constantly changing financial environment, PIPE finance continues to be a flexible and crucial tool for businesses across a range of industries to meet their operating and expansion objectives. Read more about the successful PIPE transaction advised by ARC Group here.

ARC Group

At ARC Group, we understand the value that PIPE can bring to the company, be it to support growth or to improve capital structure, we stand by here to help you achieve your goal seamlessly. If you ever think of doing a PIPE transaction, with proven track records in executing and securing PIPEs for multiple companies across the globe, ARC Group’s seasoned advisory team is here to support you along the way.

Discover how ARC Group’s Capital Markets team can assist in optimizing your PIPE transactions and achieving your strategic goals. Learn more about our expert solutions and proven track record here.

Read more about our advisory & strategy expertise

References

1. General Questions about PIPEs. (n.d.). https://www.sec.gov/info/smallbus/gbfor25_2006/pinedo_tanenbaum_pipefaq.pdf
2. Bajaj FinServ. (2023). Private investment in public equity. Www.bajajfinserv.in; Bajaj Finserv. https://www.bajajfinserv.in/investments/private-investment-in-public-equity
3. Segal, T. (n.d.). PIPE Dream: Firms Raise Money Fast via Private Investment in Public Equity. Investopedia. https://www.investopedia.com/terms/p/pipe.asp
4. ORIC Pharmaceuticals Announces $125 Million Private Placement Financing | ORIC Pharmaceuticals, Inc. (2024). ORIC Pharmaceuticals, Inc. https://investors.oricpharma.com/news-releases/news-release-details/oric-pharmaceuticals-announces-125-million-private-placement
5. ORIC Pharmaceuticals Reports Fourth Quarter and Full Year 2023 Financial Results and Operational Updates | ORIC Pharmaceuticals, Inc. (2023). ORIC Pharmaceuticals, Inc. https://investors.oricpharma.com/news-releases/news-release-details/oric-pharmaceuticals-reports-fourth-quarter-and-full-year-2023
6. Camarero, S. (2023, March 30). Apollomics, Announces Closing of Business Combination and Listing on Nasdaq – ARC Group. ARC Group. https://arc-group.com/apollomics-announces-closing-of-business-combination-and-listing-on-nasdaq/