Capital Markets

PIPEs Are Smoking

“If this pace continues, 2006 should set new records for both number of transactions and total dollars raised in the U.S. PIPE market,” a research ...
Stephen TaubJuly 20, 2006

The market for PIPEs, also known as private investments in public equity was very strong in the first half of this year.

During the six-month period, there were 702 transactions totaling $16.2 billion in equity and equity-linked capital raised (excluding structured equity lines and Canadian domiciled issuers), according to Sagient Research Systems, which keeps score of these and other financial transactions.

That represented a transaction-count rise of 11.96 percent in comparison with the first half of 2005 and a 58.17 percent increase in the total dollar amount raised in the same period last year, according to the firm. “If this pace continues, 2006 should set new records for both number of transactions and total dollars raised in the U.S. PIPE market,” said Robert Kyle, executive vice president of Sagient Research.

PIPEs are usually a preferred financing vehicle for struggling companies that don’t have positive cash flow. Hedge funds and other aggressive investors have been the traditional buyers of the privately-placed paper, which is generally priced at a significant discount from the prevailing public share price.

The vehicle, however, has generated a fair amount of controversy and regulatory scrutiny. In May, for instance, the Securities and Exchange Commission settled civil charges involving PIPEs against hedge fund adviser Deephaven Capital Management, LLC and its former portfolio manager Bruce Lieberman.

The commission alleged that they engaged in insider trading from August 2001 to March 2004 on the information that 19 PIPE offerings were about to be publicly announced. In each case, the company’s stock price fell on the announcement of its PIPE offering, the commission charged.

The SEC accused Deephaven and Lieberman of learning about confidential material nonpublic details about the upcoming PIPE offerings from placement agents for the companies and then selling the company shares short.

Deephaven agreed to disgorge $2,683,270 in unlawful profits and pay $343,418 in prejudgment interest and a $2,683,270 civil penalty. Lieberman agreed to pay a $110,000 civil penalty and signed on to a commission order barring him from associating with any investment advisers for at least three years.

According to Sagient, the following five companies were the largest placement agents in the PIPE market in the first half of 2006: Rodman & Renshaw, LLC; Roth Capital Partners, LLC; Cowen and Company, LLC; Midtown Partners & Co., LLC; and Sanders Morris Harris, Inc.

The five largest investors in the first half were: Nite Capital Management, LLC; Iroquois Capital, L.P.; Highbridge International, LLC; Downsview Capital Inc.; and Cornell Capital Partners, L.P.