In this blogpost, Neil Lopez, Student, O.P. Jindal Law School and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, types of PIPE, benefits of PIPE deal, drawbacks of PIPE deals and the 5 biggest pipe deals in the year 2015.

Private Investments in Public Equity (PIPE) transactions involve private investments made by investment firms, mutual funds, and other qualified investors. It is sold by the company at a discount rate in the current market value. The investments may be in shares, stock or convertible security of the listed company.

Types of PIPE

Traditional: common or preferred stock sold at a fixed price.

Structured: Preferred stock or debt securities sold which are convertible into common stock.

They are medium to long term investments with average holding period exceeding three years. Preference is for convertibles and to lesser degree convertible bonds followed by warrants and registered direct equity.  In PIPE deals, the primary objective is capital as it has potential to give instant returns

Benefits of a PIPE deal

A PIPE deal allows a company to avoid the complexity of selling shares through a fresh public issue. Instead, the company sells newly issued shares at an agreed price or debt which can be converted later on into shares to an investor. The PIPE process is simple, fast, and inexpensive.

Due to the difficulty of exits, private equity firms have progressively begun to invest in listed companies for better returns.

Some of the advantages of a PIPE deal are as follows:

1. There is no fear of under subscription as it is fixed beforehand between the investor and investee.
2. A PIPE fund raising process is much faster than a fresh public issue of shares which involves a lot of compliance formalities and is an arduous process.
3. The due diligence is quick because target company is in public domain, therefore time and cost are saved for the investor
4. Since it is a private placement, the information of raising capital can be kept confidential;
5. There is less equity dilution since the issue is made to private investors

Drawbacks of PIPE deals

1. Control- Unlike private equity investments, PIPE investors will not have a seat on the board or have a say in the business strategy of the company.
2. Liquidity- In most instances, PIPE investments offer short-term liquidity through the resale registration process but in some sponsored PIPE deals the investors are restricted from selling for a specified period.
3. Transaction Fee -Sometimes transaction fees are paid to the investor from the proceeds of the financing which may be around 1% of the gross proceeds.

Regulatory framework

A PIPE transaction in India has to comply with the conditions stipulated under SEBI guidelines for preferential issues.

Further, the SEBI Insider Trading Regulations has restricted share trading by the investor or his advisor if they have clandestinely utilized any unpublished price sensitive information during the PIPE transactions.

PIPE Deals in India

Since 2007, the banking and financial services sectors have mostly constituted a majority of the PIPE deals. For example, in 2015, banking and financial services had comprised over 45% of the total PIPE investments. However, in 2012, IT and ITES (Information Technology Enabled ServiceS) accounted for 45.5% of the PIPE investments.

PIPE deals had crossed the $1-billion mark in the first half of the calendar year 2015. This was higher than the total PIPE investments in 2013 and 2014. Private investment in public equity has increased 40% in 2015, according to data available from VCC Edge, a database of PE deal activity, and JM Financial Ltd[1]

According to Sanjeev Krishan, leader of private equity and transactions at Pricewaterhouse Cooper, a majority of PIPE deals are led by a handful of large private equity funds which invest in financial services firms as well as healthcare sectors.

5 Biggest PIPE deals for the year 2005

1. Apax Partners buys a 20.4% stake in Shriram City Union Finance for $383 million.

Apax bought the stake from TPG Capital while TPG made a bumper exit with returns of close to 4.5 times[2].   The purchase was transacted through its subsidiary, Dynasty Acquisition (FPI) Ltd. TPG had originally picked the stake in Shriram City in August 2013. The deal was valued at Rs 1,207.29 crore (about $180 million)[3].

2. Kuwait Investment Authority invested 300 million in GMR Infrastructure Ltd for 18% stake.

GMR Infrastructure Ltd had raised $300 million by selling foreign currency convertible bonds (FCCBs) to Kuwait Investment Authority (KIA), a sovereign wealth fund[4].  KIA had agreed to subscribe to a 60-year-long FCCB issued by GMR, the flagship company of the GMR Group.  The rationale for this investment was to improve the financial health of the target and to repay outstanding obligations of the target.

3. Temasek’s $150 million investment in drug maker Glenmark Pharmaceuticals Ltd

The third largest PIPE deal this year has been the Singapore government-owned investment firm Temasek’s $150 million investment in Glenmark Pharmaceuticals Ltd. This investment was also executed through its subsidiary Aranda Investments (Mauritius) Pte Ltd[5]. This gave it a 3.8 per cent stake in the Indian drug maker, making it the single-largest institutional investor in the company.

4. KKR, Leapfrog, IVFA invested 80 million for 19.56% stake in Magma Fincorp.

Magma Fincorp Ltd, a non-banking financial company (NBFC) backed by a clutch of private equity funds had raised Rs 500 crores ($80 million) through a preferential allotment of equity shares to India Value Fund Advisors (IVFA) and LeapFrog Investments[6].  The company has issued 46.3 million equity shares at a price of Rs 108 per share to all three investors.  Post allotment, IVFA would own 8.6 percent, LeapFrog would get 7.82 percent while KKR would retain its 16 percent holding. [7]

5. Cartica Capital invested 50 million for 3.88 % stake in PI Firms.

Cartica Capital invested in 5.29 million shares, representing 3.88% stake in PI Industries at a price of Rs 605 per share on the BSE, according to bulk deal data available with the stock exchange[8].

Conclusion

As the PIPE market continues to grow, there are multiple opportunities for private equity investors to invest in a range of companies. PIPE deals give access to capital at a lower cost to finance growth and working capital requirements.

PIPE investments offer investors a chance to acquire a block of shares in one go coupled with the prospect of profitable exits with high gains as seen in the above examples.

As the government pushes its agenda of foreign investment and ease of doing business in India as well as abroad availability of good companies available in the listed space and access to foreign funds, PIPE deals offer a plethora of funding opportunities for large as well as SME companies.

[1] . Pooja Sarkar, ‘PIPE Deals Up 40% So Far This Year’ (http://www.livemint.com/, 2015) <http://www.livemint.com/Companies/HGElLKXTdpZSSg1qg3YTvL/PIPE-deals-up-40-so-far-this-year.html> accessed 31 March 2016.

[2] ‘Apax Partners Buys 20.37% Stake In Shriram City Union Finance; TPG Capital Exits | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/finance/2015/05/13/apax-partners-buys-2037-stake-shriram-city-union-finance-tpg-capital-exits> accessed 31 March 2016.

[3] ‘PE Firm Apax Buys TPG’S 20.3% Stake In Shriram City Union Finance’ (timesofindia-economictimes, 2015) <http://articles.economictimes.indiatimes.com/2015-05-13/news/62124062_1_apax-partners-shriram-city-union-finance-scuf> accessed 31 March 2016.

[4] P.R. Sanjai, ‘GMR Raises $300 Mn By Selling Fccbs To Kuwait Investment Authority’ (http://www.livemint.com/, 2015) <http://www.livemint.com/Companies/Cn1HHekVPvt7cSM9Bcy0bJ/GMR-raises-300-mn-by-selling-FCCBs-to-Kuwait-Investment-Aut.html> accessed 31 March 2016.

[5] Temasek had subscribed to 10.8 million shares valued at Rs 875 each.  ‘Temasek To Invest $151M In Glenmark Pharma | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/pharmaceuticals/2015/04/17/temasek-invest-150m-glenmark-pharma> accessed 31 March 2016.

[6] ‘Magma Fincorp To Raise $80M From IVFA, Leapfrog & KKR | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/finance/2015/03/30/magma-fincorp-raise-80m-ivfa-leapfrog-kkr> accessed 31 March 2016.

[7] idem

[8] SI Reporter, ‘PI Industries Surges Post Stake Buy By Cartica Capital’ (Business-standard.com, 2016) <http://www.business-standard.com/article/markets/pi-industries-surges-post-stake-buy-by-cartica-capital-115061600207_1.html> accessed 31 March 2016.