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).
After investing in micro cap stocks for a decade, I’ve invested in my fair share of PIPE’s through the years. When I look back and tally the success failure rate of those PIPE transactions versus simply buying stock in the open market, it would seem that I should stick to buying in the open market. That said, one winner negates out about 5 losers, so I often have to take that into consideration.
When investing via a PIPE it’s smart to take a few things into consideration:
- Deal Structure: Is it enticing enough? Is it too enticing? If there is warrant coverage in the PIPE given (2) and (3) below, is the common stock going to be punted as soon as it can be because they hold a free long term warrant.
- Who is the registered broker for the deal? Certain ones are notoriously bad at picking, starting, and completing a PIPE transaction.
- Who are the investors in the deal? Certain micro cap investors, funds, institutions are known to hit the exit doors as soon as they can.
As the years have gone by, I’ve invested less and less in PIPEs and TRY to focus on micro cap companies that have limited financing risk. This said, I’m still drawn into them from time to time because of the leverage they provide.