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For most investors today, it is literally a “PIPE dream”.
PIPEs, or private investments in public shares, are mechanisms for companies to raise capital from a select group of investors outside the market. But as PIPEs are increasingly being deployed in conjunction with an increase in SPAC mergers, a larger group of fund managers is seeking access to this title, with limits on who and how many can invest.
While SPACs, or special purpose acquisition companies, will use public markets to raise capital to finance a future acquisition, PIPEs are allocated to a small group of investors. Fund managers participating in PIPE will sign a confidentiality agreement, with marketing restrictions, and will be taken to a proverbial “wall”, where they receive material and non-public information from SPAC about which target they are looking to acquire. They can then choose whether or not to invest in SPAC’s IPO price – or sometimes at a discount – and assemble what they expect to be a pop when the acquisition is announced.
Bankers at several companies told CNBC that they recently received an increase in interest from investors looking for future opportunities in PIPE.
“Many of these transactions are performing very well and were well received in the post-announcement period,” said Warren Fixmer, who runs SPAC Equity Capital Markets at Bank of America. “So the alpha generation it represents is obviously attracting a broader group of investors.”
In 2020, PIPEs generated $ 12.4 billion in supplementary capital to help finance 46 SPAC mergers, according to data obtained by Morgan Stanley. His data analyzed SPAC’s businesses with valuations over half a billion dollars. On average, PIPE’s capital added almost three times the purchasing power to SPAC, said Morgan Stanley. For every $ 100 million raised through a SPAC, a corresponding PIPE added another $ 167 million, the data showed.
A lot of money in PIPEs
Some of the largest PIPEs have exceeded $ 1 billion in size and have been committed in recent months. The latter was announced Monday morning, with the acquisition of Alight Solutions by Foley Trasimene’s Acquisition Corp., which included a $ 1.55 billion private placement. Another Foley SPAC used a private placement of $ 2 billion, announcing in December an agreement to buy Paysafe. Chamath Palihapitiya’s SPAC, Capital Social Hedosophia V, is implementing a $ 1.2 billion PIPE to acquire SoFi. In addition, Altimar Acquisition Corporation announced an agreement with Owl Rock and Dyal to make the alternative asset manager public combined with a $ 1.5 billion PIPE.
More committed PIPEs will lag behind SPAC’s IPOs, meaning that if 2020 was the peak year for SPAC, 2021 and 2022 will be the time when these vehicles will merge.
Morgan Stanley data showed that there is still more than $ 90 billion in “dry powder” that needs to be used for acquisitions in the next two years or less. This implies that a total of $ 117 billion of PIPE capital must be raised in connection with SPAC mergers during that period, said Morgan Stanley.
Against this background, potential PIPE investors are calling for mass placement agents and seeking to be included in the financing of these mergers, bankers from three different companies told CNBC.
The increasing prevalence of this product is raising concerns about the potential lack of understanding among SPAC’s broader cohort of investors about how these investments work.
“There are two generic losers, or people at risk: the first is the existing shareholders, but the second is the perception of the fairness of our capital markets,” said Harvey Pitt, former chairman of the Securities and Exchange Commission. “People who are unaware of the disclosures, people who cannot get the benefit of these price discounts and people who are seeing the the power of its shareholdings has been reduced due to what we call dilution. ”
PIPE investors usually receive their securities at a discount from at least the market price and sometimes obtain shares below the IPO price. About a third of the SPACs in the 2019-2020 merger cohort that issued shares in PIPEs, sold those shares at a 10 percent or more discount on the IPO price, according to a recent SPAC study by Stanford Law School and New York University School of Law. This could end up diluting investors who acquired shares in the SPAC IPO.
PIPE investors can pressure stocks
A key issue, Pitt said, is what kind of disclosure investors in PIPEs receive compared to the broader market. While he notes that it would be “entirely appropriate” for SPAC to share potential merger plans or things of that nature, other details about the company’s future could be a grayer area.
But proponents of PIPEs say that they serve as a validation signal to the market and therefore can improve performance. The 2020 SPACs that included PIPEs had an average performance of 46 percent, a month after closing their businesses, according to Morgan Stanley. Those without PIPEs saw gains of less than half that (21 percent) in the same period.
But, since investors in PIPE are qualified to sell, this can put pressure on the overall stock, as it widens the float. This usually occurs in the weeks following the closing of a SPAC deal – much shorter than the typical IPO block.
Because of these factors, PIPEs may be an area that attracts more regulatory scrutiny this year, as investors begin to better understand the rules and the potential financial impact around these bonds in relation to public shares in SPACs.
“It is not illegal to get involved in one of these offerings, but there are, say, minefields throughout the process that can turn what might be legal into something that is illegal or crosses that line,” said Pitt, who currently serves as the CEO from Kalorama Partners, a consulting company. “This is why there needs to be a scrutiny, and that is why there is a scrutiny of these transactions.”