The amount of hedge-fund money flowing into public companies has skyrocketed in the past year, thanks to a financing mechanism known as PIPE, or “private investment in public equity.”
PIPE investments, which involve the issuance of large chunks of new stock to a qualified investor, rose 20 percent in the first quarter, to $6.03 billion, according to PlacementTracker, a unit of Sagient Research Systems of San Diego, which provides data on private placements.
PIPE offerings cost less than public offerings and require minimal regulatory oversight, making them attractive for small companies. The companies typically agree to discount the shares by anywhere from 5 percent to 20 percent, with the agreement that they can’t be resold to the public for two months or more.
Many investment bankers and lawyers say that hedge funds are changing the dynamics of capital-raising and the capital markets by taking large positions in small companies and profiting on their trades.
“The PIPEs market is very, very lucrative,” said Mark Klein, a partner at Kirkpatrick & Lockhart Nicholson Graham LLP in Los Angeles, who represents brokerage firms that issue PIPE shares to hedge funds. “It’s so difficult to do an IPO now and if a company wants to raise $30 million, this allows quick access to the public markets.”
Roth Capital Partners LLC of Newport Beach ranked second behind New York’s Rodman & Renshaw LLC as the top placement agent for PIPE transactions in the U.S. Local companies that are active PIPE investors include Yucaipa Companies Ltd. and Oaktree Capital Management LLC. (Yucaipa’s planned $150 million investment in Pathmark Stores Inc., for example, is a PIPE.)
With so much money involved, it was only a matter of time before regulators took notice.
The full story
is available in the June 20 issue of the Los Angeles Business Journal.