PIPE’s: Can They Ease The Broker’s Pain?

Can the PIPE market prop up profits on Wall Street?

We have learned not to underestimate the creativity Investment Bankers and Private Equity professionals are able to muster under duress. And they are under duress.

Investment Banks generated close to $10 billion in fees in the first half of 2007 from LBO’s. With merger Monday dead and buried, these fees will fall precipitously . As Steven Rattner said in early August:

``It’s impossible to conclude that it’s not going to be a tougher time for Wall Street,’’ said Steven Rattner, co-founder of New York-based buyout firm Quadrangle Group and former vice chairman of Lazard Freres & Co. ``There’s going to be an impact on revenues and profits Bloomberg

With LBO’s dead, will PIPE’s rise to the occasion?  Private Investment’s in Public Equity have long been thought to be the province of 3rd tier brokerage firms peddling small deals to small and micro-cap managers. But the big boys have been active in the marketplace as well.  Private equity firms and others are sitting on war chests, and will feel the pinch to put the money to work lest they lose the assets and fees. The credit markets might be in lock down, but bankers need to keep the gravy train moving forward. Don’t underestimate them, self-preservation drives innovation on Wall Street.

Legitimate institutions will continue to embrace PIPE’s, and their patina of illegitimacy might soon be a thing of the past. It might be the quickest fix to what ails bankers and markets. Although PIPE’s were once thought to a backwater, the market is thriving below the surface…

Robert F. Kyle, executive vice president of Sagient Research said, “The amount raised in the first half of 2007 was the largest ever in the history of the PIPE market. During the first six months, we recorded 645 PIPE transactions totaling $22.42 billion in equity and equity-linked capital raised (excluding Structured Equity Lines and Canadian issuers). Although the number of transactions dipped slightly versus the first half of last year, the amount raised represents an astounding 38% increase over the total amount raised during the first half of 2006 and puts the market on track to smash last year’s record volume of PIPE activity. Sagient Research

PIPE League Tables Through June 2007

1) UBS
2) Credit Suisse
3) Lehman
4) Citigroup
5) Morgan Stanley
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Pipe Definition

A private investment firm’s, mutual fund’s or other qualified investors’ purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares).

This financing technique is popular due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues with the SEC and there is also no need for an expensive roadshow, lowering both the costs and time it takes to receive capital. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing.

Investopedia
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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