Capital Markets

PIPE Dreams

Number of private investments in public equity companies dwindles, but deal size gets bigger.
Marie LeoneNovember 20, 2001

The wave of desperation may have finally crested in the PIPE (private investment in public equity) market, as fewer capital-hungry issuers have come to the table this year. During the first three quarters of 2001, only 810 PIPE deals were inked, albeit a healthy $57.6 billion was raised, reports DirectPlacement Inc. That’s compared with the record 1,348 transactions completed last year, which raised $58.5 billion.

It’s likely that the decrease in PIPE activity means that issuers are avoiding the infamous “death spiral” deals that were plentiful when E-companies were desperate for capital at any cost. (See “Floorless Debt: The Devil’s Candy,” in Newswatch, CFO, March 2001.) Longtime PIPE purveyor Warren Bagatelle, managing director at Loeb Partners Corp., says that such floorless debt gives PIPEs a bad name, and he warns issuers to avoid any transaction that is similarly tied to short-term investor incentives, such as sinking stock prices.

Some experts believe, though, that the deal structure isn’t the problem when a PIPE goes up in smoke. “It’s the management that fails in these transactions,” asserts Richard Rosenblum, managing director at investment firm vFinance Corp., referring to distressed companies that have terrible business plans and misuse PIPE proceeds. Consider the debacle surrounding Nasdaq-delisted World Wide Wireless Communications Inc., whose anemic business plan and management team burned through a $7 million PIPE in eight months. Its private investors claim that among other fiduciary offenses, WWWC’s original executives didn’t register shares in a timely fashion, leaving convertible bondholders holding nothing more than the proverbial bag. In April, investors kicked out three board members and brought in a new CEO.

Rosenblum says that PIPEs are successful when companies are smart with their capital. Witness Rail America Inc., an Old Economy short-haul carrier that was shut out of the public markets last June. CFO Bennett Marks used a PIPE to raise $38.3 million in a straight stock transaction. Since then, Rail America has steamed ahead, doubling its stock price — now $12 — in one year.

Private Ayes

Convertible bond 144A private placements, Q3.

  • Number of 144A issues: 13
  • Total number of issues: 14
  • Average issue size: $557 million