Traditional IPOs and stock issues can take a long time for the issuing company to receive funds from investors. Alternative strategies to raise funds from accredited institutional investors have been available for decades but recently have become more popular, given the appetite for issuers to raise funds quickly and cost-effectively — and for investors to move quickly and take ownership of companies with growth potential.
These two strategies include the SPACs (special purpose acquisition companies) and PIPEs (private investments in public equities). The two are separate but recently have been commingled as a joint strategy that satisfies the needs of both investors and issuers.
SPACs: A Refresher
A special purpose acquisition company (SPAC) is a newly formed company with no commercial operations, otherwise known as a shell corporation. With no operations, income or profit, a SPAC, known as the sponsor, raises capital in an IPO with the single intent of acquiring an existing company, otherwise known as a target company. Once public, the SPAC now has assets in the form of cash raised from investors.
While popular last year — there were 362 SPAC IPOs in 2021, raising $107 billion, according to law firm White and Case — they have dropped dramatically in 2022. Only 68 SPACs have gone public in the first half of 2022, raising $12 billion.
SPACs are attractive for smaller companies looking to go public quickly and more cost-effectively. Because the funds already exist and the share price has already been set before the SPAC acquires the target company, pricing uncertainty and other variables are removed. The management of the target company also receives the benefit of partnering with the SPAC’s leadership, accessing their experience and financial acumen to raise future funds.
PIPEs: A Refresher
A private investment in public equity (PIPE) refers to a private placement of shares of an already publicly listed company to a select group of accredited investors. PIPEs have been viewed as a benefit for companies because they can raise a large amount of money quickly. For PIPE investors, the benefit is that they can buy a large number of a public company’s shares at a discounted price.
PIPE investors are typically large private investors, such as hedge funds, mutual funds and other larger institutional investors, who seek to allocate a portion of their portfolios to public equities. These investors are sophisticated and accredited and know that they receive a price advantage by using a PIPE rather than by buying the target company’s shares directly via a stock purchase in the public market.
Combining SPAC PIPE Deals
PIPE deals are popular because of their efficiency and speed. There is less paperwork involved, as disclosure of the transaction to the public is required only after definitive purchase commitments are received from investors.
Any publicly traded company can initiate a PIPE deal with an accredited investor. Of course, once a SPAC goes public, it, too, can initiate a PIPE. Before the SPAC boom, public companies have pulled the PIPE lever to bring in funds from institutional investors for special projects, to bridge a downturn, restructure their operations and achieve other goals.
However, the PIPE and the SPAC are now seen as popular capital-raising vehicles taken together. The PIPE has become such an integral step in the SPAC merger strategy that many target companies approached by SPAC management teams scrutinize sponsor relationships with investors and their past track record of successful PIPEs.
PIPE deals are often prevalent in SPAC transactions because sponsors need to raise more money than they get in their IPO to complete the acquisition of companies that are viable for the SPAC. Oftentimes, these target companies cost more than the money SPAC sponsors have raised through their IPO.
To attract PIPE investors, the SPAC sponsors will provide the investors with material non-public information about which target they’re looking to acquire. The investors then invest at the SPAC’s IPO price or most times at a slight discount to the IPO price.
“A SPAC can seek a PIPE deal if it needs to raise additional capital to close a merger transaction with a target company,” explains Ruchi Gupta in Market Realist. “A PIPE arrangement may become necessary where the cost of acquiring a target company exceeds the funds that a SPAC has in its trust account.”
The Right Technology to Complete a Transaction
Given the quick turnaround of a PIPE deal — sometimes as little as two weeks — issuers and investors need all of the right technology and resources to ensure a smooth transaction.
Having a trusted virtual data room (VDR) partner such as CapLinked is critical to ensuring that the deal closes — even if transaction times are shorter than a traditional IPO or M&A transaction. Bottlenecks can delay a transaction, preventing operations or other corporate initiatives from continuing. Start your free trial today to see how CapLinked can help streamline all aspects of the PIPE transaction process.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, he covers such topics as security, mobility, e-commerce and the Internet of Things.
Market Realist – Why SPAC Sponsors May Seek a PIPE Deal — And What That Means
Menabytes – A primer on SPACs and PIPEs: How they work
White and Case – US SPACs Data Hub