PIPEs kept in reserve as market unclogs
27 May 2020
Private investment in public equity increased this year in response to the COVID-19 pandemic, but activity remains far below the amount of investment that took place during the 2008 financial crisis, Dealogic data shows.
Year to date through mid-May, public companies raised USD 8.8bn in private investment through 76 convertible debt and common equity deals. For the same time period in 2008, there were 249 deals that raised USD 22.2bn, including 103 convertible deals that raised USD 16.6bn, according to the data. Ion Group owns Dealogic and Acuris, the publisher of this news service.
In the years between 2008 and 2020, PIPE activity by deal value bottomed out in 2014 when just USD 436m was raised through mid-May. The number of deals and amount raised since then has steadily increased. For the 2019 period, companies raised USD 4.7bn in 83 convertible and common equity deals, according to the data.
Source: Dealogic
Since March, companies have been rushing to raise capital so that they can survive the immediate impact of government shutdown orders and the longer-term effects of the recession caused by the pandemic. Back in 2008, companies turned to PIPE deals as credit markets locked up and financial institutions looked to bolster capital reserves.
So-called PIPE deals carry more expensive terms than public offerings of debt, equity and convertible notes, so companies often explore alternative measures to boost liquidity before turning to PIPEs, according to industry bankers and attorneys. These advisors said that while there have not been many PIPEs in 2020, the number could increase going forward if market conditions deteriorate.
Utility CenterPoint Energy [NYSE:CNP] raised the most capital through a PIPE since the start of the pandemic, according to the Dealogic data, issuing USD 725m in convertible preferred shares and USD 675m in common stock to a number of investors in early May.
After plunging in March, debt and equity markets have rallied in recent weeks following actions taken by the Federal Reserve and Congress to stabilize markets and the economy even though job losses have reached record highs. Many stocks continue to trade well below pre-pandemic levels, especially for companies directly impacted by the health crisis.
“A PIPE prices off where the stock is trading so you only do it if you have to,” said an education sector banker. For this reason, PIPEs are more likely among distressed companies and a surge is unlikely unless other sources of financing dry up. “It’s the backup plan,” he said.
Eva Davis, co-chair of the global private equity practice of Winston & Strawn, said that PIPEs have the advantage of being flexible. The investments can be structured using preferred stock, common stock, warrants, redemption features and rights to board seats.
Another advantage is that they can be executed quickly, even overnight, following a week or two of preparation, Davis said. “I’ve not yet seen this in a large way. It’s still pretty early.” But Davis added, “I do think these are coming.”
Financial sponsors have proved to be eager PIPE investors as they look to invest massive funds raised prior to the crisis and traditional buyout activity slows.
“In the past four to six weeks, we’ve been in discussions involving at least a dozen PIPEs, two or three of which are currently active,” said Paul Bird, M&A partner at Debevoise & Plimpton. “There is somewhat of a herd mentality around this opportunity, and financial advisors are eager to promote them to companies and boards while buyout activity has been put on the middle burner to a large degree and public capital markets activity is quiet.”
A technology sector banker said PIPEs are a good fit for companies experiencing interim disruptions. “If you’re not working on a PIPE as a banker right now, you’re not getting paid this year.” A lot of PIPEs will be for travel, food delivery, e-commerce and auto-related companies, he said. “Anything that has temporary issues; otherwise it’s the folks that have been mispriced,” he said.
An industrials banker said one of his larger clients recently was approached by a major private equity firm about making a minority investment in one of its subsidiaries. The client asked: “is it appropriate for a one-off or do we need to do a market check?” The banker responded that “I wouldn’t call 10 people but probably a handful would make sense.”
Many of the PIPE investments this year have involved investors that already had an equity stake or were previous investors in the companies raising the capital. Because the pricing of a PIPE is complicated, with embedded options and warrants, which are valuable because they have so much volatility, “it’s hard to do this with an uninitiated PE. These will be cousin deals,” the industrials banker said.
Davis agreed. “People who know the company are more likely to do PIPEs.”
Companies exploring PIPEs are reaching out to incumbent investors as well as multiple other sources of private capital to secure the best terms, Bird said. Some of the capital is for deleveraging purposes, while other PIPEs are being sought to provide liquidity and support the company’s balance sheet, he added.
Companies that have secured PIPEs include food distributor US Foods [NYSE:USFD], restaurant chain The Cheesecake Factory [NASDAQ:CAKE], childcare provider Bright Horizons Family Solutions [NYSE:BFAM], fintech group EVO Payments [NASDAQ:EVOP] and animal health company Covetrus [NASDAQ:CVET].
Other companies have used different instruments like convertible debt or new equity offerings to shore up capital. Teladoc Health [NYSE:TDC], a telemedicine company, announced a USD 800m convertible senior note offering on 14 May, while Five9 [NADAQ:FIVN], a cloud contact center provider, priced a USD 650m senior convertible note offering on 22 May.
Earlier in April, two restaurant chains, Dave & Buster’s [NASDAQ:PLAY] and Shake Shack [NYSE:SHAK], announced at-the-market equity share offerings.
