If a company that sells shares on the open stock market wants to raise cash quickly on of the ways for it to accomplish this is through a PIPE. This benefits the company concerned as it does not have to go to the expense associated with a secondary offering nor does it have to wait for the lengthy advertising that accompanies such an offering.
The company instead offers shares to a private investment company at a discounted rate which is below the share value quoted on the stock exchange. These shares are then offloaded to investors at a low price. However there are many reasons why a company needs to find funds quickly; they might just be temporarily in need of a cash injection perhaps while waiting for the launch of a new product or while waiting to complete a sale of a commodity which will happen as soon as the market price is right.
However having to sell shares in this way could mean that the company is in a poor financial position from which it may not recover even with a fresh injection of capital from the PIPE offer. An investment in a PIPE cannot be guaranteed to bring returns, although if it is a structured PIPE it is less likely that an investor will lose money.
What Types of Company Resort to PIPES?
Small to medium-sized companies are generally the ones who use PIPE financing because they cannot command injections of cash by other means as large companies typically can. So you will be buying into one of these smaller companies and not a giant in the field. However you can still pick up bargains in terms of share prices, and can cash in on them if you want to at a later date.
In the recent recession the PIPE market has been viewed more negatively than even in the past. For example, in 2009 China Investment Group entered into a PIPE transaction with Morgan Stanley, and Abu Dhabi Investment Authority also did the same with Citigroup. Since the beginning of this year, shares in Morgan Stanley have fallen by 40% and Citigroup shares have fallen by 60%. Clearly the companies who bought into these two US firms are having to wait a long time to see any return on their investments.
Buying into a PIPE is not a guarantee of making money and certainly not a good way of seeing a fast return on your investment, unless you strike lucky. Structured PIPEs allow you to convert your security into stock at a later date which may be fixed by the companies and these are better in the long term than ordinary PIPEs as regards the risk involved to investors. If you have money to invest and can wait for a return on it, then you could consider buying into PIPE financing. However you should be prepared for a long wait in times of recession.