Private Investment

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Private Investment
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Private investment in public equities (PIPEs) is a common means of financing reverse mergers. In a PIPE offering, a firm with publicly traded shares sells, usually at a discount, newly issued but unregistered securities, typically stock or convertible debt, directly to investors in a private deal. The issuing firm is required to file a shelf registration statement, Form S-3, with the SEC as quickly as possible (usually between 10 and 45 days after issuance) and to use its “best efforts” to complete registration within 30 days after filing. PIPEs also are used in conjunction with a reverse merger to provide companies financing once they are listed on the public exchange. 47
George J. Papaioannou , Ahmet K. Karagozoglu , in Underwriting Services and the New Issues Market , 2017
Private Investment in Public Equity (PIPE) is a method of capital raising by firms having difficulty raising equity through more traditional channels, like a seasoned equity offering. Such firms may also be in financial distress or urgent need of funds and need expeditious financing. PIPE shares are issued under the SEC rules governing private placements. Hence, speed of execution comes at the cost of restrictions on the resale of the new shares. Nonetheless, PIPE investors gain access to the secondary market much sooner than investors in typical private placements because the PIPE issuers are required to register the new shares with the SEC within 30 days of signing the purchase agreement.
PIPE transactions are classified as “traditional” if they offer common stock and fixed-price convertibles and as “structured” if they offer common stock along with contingent securities, like floating price convertibles or convertible resets. The inclusion of contingent claims has the purpose to either condition the availability of funds on firm performance (as in the case of PIPEs with warrants) or to reduce losses to the PIPE investors because of miss-estimation of the risks of their investment (as in the case of PIPEs with resets of the warrants’ exercise price or floating price convertible or convertible resets). The inclusion of these investor-friendly terms enables issuers to negotiate a higher offer price or a lower price discount.
The issuer usually retains an underwriter who acts as a placement agent. In this capacity, the underwriter prepares the offering memorandum, organizes roadshows, and presentations to investors and markets the issue. The agent’s fee may include sweeteners that grant the agent the right to execute future PIPEs or other financing activities. The value of the underwriter rises with the complexity of the special terms in the offer. The total flotation cost for PIPE transactions includes the agent’s fees, the price discount from the current stock price, and the value of any warrants granted to investors. PIPEs are executed with a "best efforts" contract and, hence, the underwriter has no responsibility to take up any unsold securities.
Chaplinsky and Haushalter (2010) find that PIPEs with contingent claim contracts, like warrants and price resets, are associated with firms that burn a lot of cash, have mostly intangible assets and poor stock performance prior to the issue—that is, firms with greater moral hazard and adverse selection problems. Inclusion of the contingent claims shows that the price discount is not enough to compensate investors in the case of such financially constrained issuers. Dai, Jo, and Schatzberg (2010) report an average agent fee of 6.2%. They also find that the probability of retaining an agent is inversely related to financial distress, and reputable underwriters are preferred for the quality of their analysts.
PIPEs have grown considerably as a capital raising method from $4.1 billion in 1996 to $16.8 billion in 2005 ( Dai, Jo, and Schatzberg, 2010 ). A more recent study ( Bengtsson and Dai, 2014 ) reports that there were about 15,000 PIPE transactions from 1999 to 2012 that raised over $500 billion. The top five agents by gross proceeds raised were Goldman Sachs & Co., JP Morgan Chase & Co., Credit Suisse Securities (USA) LLC, UBS Investment Bank, and Citigroup Global Markets, Inc.
PIPE is an investment made in a company listed in the stock exchange. Even though the investment is made in a public entity, it still belongs to the private equity world as the profit mechanism is not related to the stock exchange. The private equity aims at reaching capital gains and return using the usual private equity market, and not the stock exchange.
The purpose of the operation is not to speculate, but to buy a minority stake and to sell it to another potential shareholder at a price not based on stock exchange benchmarks (this price is usually three-four times bigger).
This stake has to be big enough to make the final buyer become the largest shareholder. To make this deal work the private equity investor has to understand the minimum amount of ownership necessary to be the owner of the company. For this reason, these deals can be hostile, which is to say, they can occur without the consent of the original ownership.
Private and public investments in biotechnology are typically aimed at five broad goals, namely improvements in (1) food production (agricultural and food biotechnology), (2) environmental health (environmental biotechnology), (3) materials production (industrial biotechnology), (4) human health (biomedical technology), and (5) security and national defense. Biotechnology firms are also motivated by the goal of wealth, which can be achieved if their products are widely used in the service of these other goals. The link between biotechnology and these goals lies at the heart of proponents’ arguments in favor of biotechnology and opponents’ arguments against it.
The predominant goals of agricultural biotechnologies are given urgency by several trends, including population growth, rising standards of living and consumption levels, climate change, persistent malnutrition and hunger, and dependence on toxic pesticides. Key objectives of agricultural biotechnology are designed to accommodate and in some cases reverse these trends. They include increasing crop yields, decreasing crop vulnerabilities to environmental stressors (e.g., flood, drought, and poor soil conditions), increasing nutritional qualities of crops (e.g., vitamins and minerals), reducing dependence on pesticides, and producing novel substances (e.g., insulin and vaccines).
Genetically engineered or transgenic crops were first commercially grown in 1996. By 2008, 25 countries planted such crops covering more than 800 million ha. World leaders are the United States, Argentina, Brazil, India, and Canada. Most crops are grown in North America, Latin and South America, and in other developing countries, including three in Africa. The three largest biotech crops are soybeans, maize, and cotton. The vast majority of foods in North America contain genetically engineered ingredients, whereas foods found in most of Europe, due to stricter regulations, have fewer such ingredients.
One of the most common genetic alterations to crops confers pesticide and herbicide resistance to crops (e.g., Roundup Ready soybeans produced by Monsanto). Approximately 100 000 ha are planted with Bt crops that contain a gene from the bacterium Bacillus thuringensis that codes for a natural insecticide. Transgenic animals are commonly created to produce human hormones, drugs, or other useful substances in practices sometimes referred to as ‘pharming.’ In the United States, the recombinant hormone rBGH (bovine growth hormone) is widely given to dairy cattle to increase milk production. Growth hormones have also been used to create larger, faster growing varieties of fish.
Food biotechnology largely aims at improving food quality and taste. The Flavr Savr tomato, for example, was genetically altered to reduce spoilage during shipping and storage. Functional or medicinal foods are those possessing health-promoting or disease-preventing properties beyond the supply of nutrients. This includes vitamin, mineral, and oil fortification.
Environmental biotechnology aims at three main goals: cleaning up pollution and waste, monitoring environmental health, and producing energy and materials in environmentally friendly ways. Ananda Chakrabarty of the General Electric Company developed the first patented form of genetically engineered life. It was a microbe that had been modified to digest petroleum in order to help clean up oil spills. This is an example of bioremediation, or the use of microorganisms to return a natural environment altered by contamination to its previous state. Bacteria engineered for bioremediation are also often engineered with bioluminescence so that researchers can monitor their effects. ‘Ecosystem engineering’ denotes the combination of basic knowledge, problem-solving techniques, and monitoring in the service of ecosystem functioning. Biofuel research and production is driven by growing global energy demands and dependence on polluting, finite fossil fuels. Biofuels can be generated from landfill off-gassing and recycled oil, as well as from crops high in sugar, starch, or oil that can be burned to yield energy. They can be derived from food crops, non-food crops, or algae.
Industrial biotechnology involves the use of cells or cell components to manufacture industrially useful products. The production of bioenergy or biofuel is often classified in this category, and indeed it overlaps with all types of biotechnology insofar as they entail industrial processes. Industrial biotechnology focuses primarily on the creation of enzymes and proteins that are useful in a variety of products and sectors from laundry to textiles and tanning to the processing of food, beverages, and animal feed.
In some of its earliest manifestations, biotechnology was linked to eugenics or various interventions in reproduction to improve the qualities of the human species or a particular population. From the mid-twentieth century, the focus of biomedical technology shifted to the traditional goal of medicine to improve the health of individuals, although it also poses refined eugenic applications. Biomedical technologies are used across the spectrum of medical activities: screening, diagnosis, monitoring, therapy, and interventions that enhance or go beyond therapy.
The vast array of biomedical technologies can be roughly grouped according to three predominant goals: extending life, controlling reproduction, and modifying human capacities and behaviors.
The first goal is the broadest because it encompasses much of the traditional aim of medicine to cure disease. It includes many pharmaceuticals and the emerging field of pharmacogenomics, which is the study of the relationship between an individual’s genome and drugs. The goal is to design drugs, using computer models, that are adapted to specific individuals. The resulting ‘personalized medicine’ also pertains to techniques for determining a person’s predisposition to a particular disease or condition. Many other biotechnologies serve the goal of life prolongation, including respirators, pacemakers, and artificial and transplanted organs and tissues. The related fields of biomaterials, tissue engineering, and regenerative medicine all strive to develop biological substitutes that restore, maintain, or improve tissue or organ function. Transgenic animals have also been created in service of the broad goal of extending life. For example, mice have been given human genes associated with cancer for use in experiments and drug trials, and pigs have been given human genes in order to create more compatible organ donors for xenotransplantation.
Cloning and IVF are examples of techniques in the service of controlling reproduction. Both techniques create embryos and potentially embryonic stem cells that can be used in biomedical research. Another important technique is preimplantation genetic diagnosis or screening (PGD or PGS). PGS permits pregnancy to begin using only those embryos that carry desired genetic traits. It is most commonly utilized by couples at risk of having a child with a chromosomal or genetic disease. However, it can also be used to serve the goals of sex selection and selection of embryos that will develop into a compatible bone marrow or umbilical cord blood donor for a sick sibling.
Biomedical technologies in the service of the third goal include artificial limbs, which can restore physical capacities with increasing precision and ease of use. Other important examples are cognitive intervention such as deep-brain stimulation; brain–computer interfaces; and psychotropic drugs that can restore motor functionality, improve communicative capacities, relieve anxiety, and otherwise alter mood and behavior. The biomedical management of capacities and behaviors can often be in the service of goals that go beyond therapy. Examples include the use of anabolic steroids, mood brighteners, and memory boosters.
Finally, biotechnologies often serve the goals of security and national defense. This, too, is a cross-cutting category because biotechnologies in the service of other goals often have security implications. There are two general categories. First, bioweapons use pathogens for the purpose of killing or harming a person or group of people. The weaponization of biological agents has a long history, but contemporary biotechnologies can create more lethal weapons through the creation of novel or more virulent pathogens. Second, biodefense or biosecurity refers to techniques for monitoring bioweapons, deterring and protecting people from biological weapons attacks, and responding to such attacks. Examples include vaccines against anthrax and other weaponized agents. Biosecurity also encompasses certain biometric technologies for recognizing individuals based on physical or behavioral traits (e.g., retinal scans). These are often used to restrict access to classified information or materials.
Unlike PIPE transactions, which are noncontrol investments, equity buyouts enable private equity firms to achieve control over companies by purchasing most, but not all, of a target company. In an equity buyout, the entire purchase is completed without borrowing any portion of the purchase price. However, the private equity investor expects that, when credit markets permit, they will borrow to fund a future large dividend that reduces their equity exposure. If companies can be acquired at a low enough cost, private equity funds may be able to achieve high returns on their equity investment even without initial leverage. Equity buyouts carry greater risk because firms are investing more of their own capital up front, compared to leveraged buyout transactions. They also lose the tax-shelter benefits of interest payments on debt, which increases the overall cost of capital. However, these issues are mitigated if the original purchase price is low enough.
An advantage of an equity buyout is that this transaction may enable a private equity fund to invest in companies without triggering a change-of-control clause that requires the target company to repay debt. For most leveraged buyouts, a private equity fund needs to raise incremental amounts of debt to repay outstanding recalled loans. An equity buyout that does not trigger debt repayment is a significant benefit because it avoids refunding fees and enables completion of a transaction even in a problematic credit environment.
An example of how a private equity fund may be able to achieve the same internal rate of return (IRR) return through either a leveraged buyout purchase of a target company at 11 times EBITDA or an equity buyout purchase of the same target company (in a depressed valuation environment) at 7 times EBITDA is found in Exhibit 20.1 . In this example, to make the comparison more straightforward, it is assumed that the both the equity buyout and leveraged buyout give 100% control of the target company.
Cross-border private investment flows are at highs globally, but not within SAARC : Recent years have seen an increase in cross-border private investment flows globally, as global investors have been seeking better yields. Post-2008 easy monetary policy by Western economies reduced yields in those countries while increasing the flow of liquidity, most of which found came to EMs in the search for higher yields. There was also a demand by global institutions for portfolio diversification in the wake of the risks highlighted by the 2008 crisis, and an exposure to EM and FM in the portfolios helped this. These factors were aided by the improving economic performance and growth potential of these economies.
Resultantly, asset flows into EM and FM funds increased. In India itself, several global funds from across geographies have bought Indian equities on the local stock markets by registering with the Indian regulator. This influx of foreign capital into the Indian markets has been intrinsic to the growth of India’s equity volumes. Today, almost 20–25% of the $800–900 billion total volumes traded in Indian cash equities segment is by foreign institutional investors. About 20% of the $12–13 trillion total volumes traded on the Indian futures and options segment is by foreign institutions. By these, one can gauge the exposure that global funds have in the Indian markets. Estimates suggest that more than 20% of the shareholding of the companies listed on the NSE is now held by foreign institutions, and they comprise the second largest group after the promoters.
However, cross-border flows are not visible between the SAARC markets themselves. A key precursor is to establish guidelines on payments and capital movement between the countries. This requires involvement of the central banks and the local banks. SAARC has been working toward this through the SAARC Finance group of regional central banks. However, private investment flows within the regional markets are yet to pick up. Given that the South Asian economies are expected to offer pools of opportunities for investors, it may be an ideal time to deepen intraregional capital flows by easing partial capital account liberalization, etc.
Low correlation between regional countries may help portfolio diversification and volatility : Investors value diversification as much as returns, even more when the financial world gets hit by crises. Diversification is a useful way to reduce risk if the holdings have low correlation to each other. The downside of one is offset by the upside in the other; as compared to portfolios which has holdings with high correlation to each other. Most South Asian economies are driven by domestic consumption and exports from certain sectors of competitive advantage to Western markets. Domestic consumption is driven by increasing purchasing power, aspirations and demands, and propensity to consume. This consumption is decoupled from global events and would have low correlation unless the products are imported and the local currencies are weakening, or the creation of jobs to support the income growth is largel
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