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In the PIPEline

Private investments in public equity, more commonly referred to as ‘PIPEs’, are often used by public companies seeking quick access to financing, particularly where public markets are not easily accessible. Weil, Gotshal & Manges recently surveyed 25 PIPE transactions announced during the 12 months ending 30 April 2008, in which private equity sponsors, sovereign wealth funds and other investors invested $100m or more. This study reports on PIPEs at a time when there has been a resurgence in high-profile PIPE investments.

• PIPE deals have become more significant in terms of the size of investments. For example, 24% of the surveyed transactions involved aggregate investments of greater than $5 billion and almost half of the surveyed transactions involved aggregate investments of greater than $500 million. Many of the largest transactions involved investments in banks and other financial institutions.
• Private equity sponsors are also acquiring significant equity stakes in public companies through PIPE transactions, frequently with the ability to either exert control over the public company or to influence management as the company’s largest stockholder. For example, 52% of surveyed transactions involved the acquisition by investors of at least 15% of the public company’s equity, 78% granted the investors at least one board seat and a small minority granted the investors approval rights over certain corporate transactions.
• Private equity sponsors generally took the equity risk of these investments with limited downside protection. Most of the surveyed transactions have been structured so that the investment is made either in the form of convertible preferred stock, common stock or both. Only two of the surveyed transactions involved an investment in convertible debt and only 32% of surveyed transactions involved a security where the investors were entitled to receive the amount they invested plus a minimum return on a fixed redemption date or earlier upon the occurrence of certain events. By contrast, investors received warrants as equity kickers in 28% of our surveyed transactions.
• Private equity sponsors also accepted the risk of a material adverse change in the business between signing and closing in a surprising number of transactions. In 39% of surveyed transactions, there was no condition to closing relating to the absence of a material adverse change in the business even though there was often a meaningful time period between signing and closing due to the need to obtain shareholder approval or obtain required regulatory or antitrust clearances.
• Certain features of going private transactions have also migrated to PIPE transactions. For example, two recent deals featured the retention of a “fiduciary out” by the board of the public company to accept a superior bid as well as a “go-shop provision”, which permitted the board to solicit other bidders. Although one of these transactions involved the acquisition by the private equity sponsors of a majority equity interest in the business the other transaction involved the acquisition of a significant minority interest.

Weil, Gotshal & Manges is a leading legal specialist in private equity services, with dedicated private equity lawyers in major financial centres throughout the world. For more information please visit www.weil.com.