Update: PIPE Activity Continues to Increase
The latest PitchBook update (www.pitchbook.com) from November shows that PIPE investment for 2009 is targeted to exceed $7B. This is greatly more than 2007 ($1.4B) when private equity had access to cheap credit so buyouts were a better option and less than 2009 ($13B) when the markets turned upside down. This makes a terrible trend line on a graph so let’s look at the situation a bit more closely. First, with the markets gaining significant value this year, well timed public investments could provide a significant boost to a fund’s value. This is the obvious play and really does not enable a PE firm to exert much control over the investment target. The second scenario is that, with credit still tight, some companies have turned to private equity as a banker to provide cash infusions. It is a very convenient marriage since PE has a significant amount of unallocated capital that it has not been able to deploy and many companies have struggled with existing debt covenants that limited a further ability to borrow. In return, the PE firm gets discounted equity or other warrants in addition to agreements such as board seats (see KKR’s investment in Kodak during September). At this point, the PE firm gets significant returns about the market and is able to influence management. In normal times, this scenario would not necessarily play out in a similar manner, but provides all parties with a win in this non-traditional banking relationship. With debt markets not fully recovered, look for more of these transactions in the near term.
