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What is a PIPE deal?

A private investment in public equity referred to as a PIPE deal, is a practice where private accredited investors buy publicly traded securities at a price lower than the current market price available to the public. It is a way for companies to raise a large chunk of money immediately and simultaneously for private investors to invest large chunks at below market price. Private investors include mutual funds and institutional investors. Since, additional shares dilute the existing share value, this practice is not supported by existing shareholders.

Why were these PIPE deals introduced?

The small and medium companies find it really difficult to raise capital as compared to their larger counterparts. The capital markets have made a way for such small companies by providing a popular medium of raising capital known as PIPE deal. After the lockup period, private investors can sell the shares anytime.

Lockup period may be introduced for companies to prevent institutional investors selling the shares as soon as the deal is complete. However, investors would prefer not having a lockup period in their deals.

Types of PIPE transactions

There are two types of PIPE transactions, mainly traditional and structured PIPE deals. Traditional deals involve a predetermined price for common stock or preferred stock convertible to common stock. Traditional PIPEs are typically priced at or near stock’s market price.

Structured PIPE, on the other hand, offers preferred or debt securities convertible to equity. They usually require shareholders approval as they pose a risk of dilution reducing current share value creating risk for existing shareholders.

PIPE deals and transactions are less costly as compared to public issue and considered appropriate for small non famous companies.

Some of the benefits of PIPE deal are:

  1. Reduces the risk of under subscription as the purchase is fixed beforehand.

  2. This process of raising capital is much faster and simple as compared to public issues which involve a lot of compliances and complexities.

  3. There is less equity dilution and details of the deal can be kept confidential as it is made to private investors.

  4. The due diligence is quick as the company is in public domain.

In 2019 India saw 61 new deals from private investments in public equity, aggregating to a value of over five billion U.S. dollars. This was an increase in the number of private investments in public equity compared to the last three years, indicating a growing interest in the Indian private equity and venture capital ecosystem.


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