The article below is from our BRIEFINGS newsletter of 05 May 2020
Public companies and investors have turned to private investments in public equity, or PIPEs, to raise capital at historically high levels given the uncertainty around the COVID-19 pandemic. Goldman Sachs Investment Banking Division’s Mike Voris and Evan Green discussed the appeal of the approach and why the trend has continued even as liquidity has returned to fixed income markets.
Mike, your team has been one of the busiest at the firm in recent weeks. What’s driving the interest in PIPEs?
Mike Voris: The sharp increase in PIPE transactions coincided with the halt in capital markets funding over a month ago when the debt and equity markets were effectively closed to new issuance. In late March and early April, companies that would have issued bonds or convertibles to raise capital found themselves in a position where their access to capital was limited. Many drew down their lines of credit but as the need for capital intensified, they turned instead to the private markets.
With PIPEs, institutional investors—ranging from private equity funds, hedge funds, and sovereign wealth funds to family offices—buy equity or equity-linked securities in a publicly traded company under a private transaction. The company gets much needed capital and, in some cases, valuable strategic input, while the investor gets a stake in the company at a discounted price for purchasing a less liquid security relative to a public financing. One thing that’s struck us in recent weeks is the level of interest we’ve had from both investors and companies. Industry volumes for PIPEs typically average between $35 billion to $40 billion a year, but we’re already running ahead of those levels with volumes increasing materially in recent weeks.
Activity in the private markets remains strong even though liquidity has returned to the fixed income markets. Why are companies continuing to pursue PIPEs?
Evan Green: In addition to capital, companies benefit from a “halo effect” since a PIPE brings “smart money” into the business. Private investors, often private equity sponsors, bring operational expertise as well as their networks and expense discipline to support the company in a complex period. We have also seen companies turn to PIPEs as a way to raise capital without having to increase their leverage, as they would otherwise have to do in the debt markets.
Mike Voris: There’s also a tremendous amount of capital sitting on the sidelines that has built up in recent years as equity valuations increased. We estimate there is roughly $1.5 to $2 trillion in private capital across private equity, hedge funds, sovereign wealth funds and family offices. With the market dislocation, investors are now able to make investments at attractive levels and on investor-friendlier terms, which can include board seats while potentially generating attractive internal rates of return on capital invested.
What types of sectors are you seeing the most activity in and how are these investments typically structured?
Evan Green: Unlike the financial crisis where interest in PIPEs was primarily focused in the financial services sector, we’re seeing interest across a wider range of sectors, such as technology and media. The transactions themselves can range from common equity or equity-linked securities, such as convertible preferred equity, to securities that act more like debt instruments, such as convertible bonds or debt plus warrants. Many companies have shifted their focus to boosting liquidity while limiting dilution, so recent PIPEs have been structured on the debt-like side of the spectrum. Issuers are utilizing the structural flexibility and tailored nature of PIPEs to match their specific needs. Given the broader macro uncertainty that is likely to persist in 2020, we expect PIPE financing activity to remain elevated.