PIPEs: Private Equity Investments in Distressed Firms Prepared by Associate Professor of Finance

1. PIPEs: Private Equity Investments in Distressed Firms Prepared by Associate Professor of Finance Ioannis Floros

2. Overall PIPE characteristics • The growth for PIPE transactions has been fueled by the number of publicly traded firms in need of additional funds • PIPEs market has grown substantially in terms of funds and raised during the time period of 1995 to 2008 – when it rivaled public equity offerings (Seasoned Equity Offerings) • Publicly-traded companies turn to PIPEs to get the financing of last resort, but also frequently use the proceeds for strategic reasons

3. PIPE specifics • Block of new shares – frequently plain vanilla common stock – are offered to a selected group of private investors at a discount • PIPEs are different than public equity offerings in that: • PIPEs are usually offered to troubled firms that have a doubtful turnaround • PIPE investors are not interested in actively managing their PIPE investments • PIPEs have a greater liquidity than VC investments and frequently offer pre-registered stock that is immediately resalable to public investors

4. PIPE market • PIPE investments may be: • Unregistered and need to abide by the S.E.C. restriction rules to be resold to other investors • Pre-registered and can be resold to public investors immediately after the consummation of the PIPE transaction • Unregistered, but with the PIPE issuers’ obligation to get the registration document effective within 120 days of the consummation of the PIPE transaction • PIPEs can be closed in a speedier way than public equity offerings- typically within two weeks • Information about the PIPE issuer is conveyed in a confidential manner and a Private Placement Memorandum

5. PIPE contracts • PIPEs can provide investors with a fair amount of downside protection (re-pricing of bundled derivative products), but also allow investors to have access to the PIPE issuer’s upside • PIPE investors want to be compensated purely with discounts, but PIPE issuers frequently present themselves with asymmetric information and agency costs which are problems that cannot simply be resolved with discounts • Frequently “price resets” are being granted to PIPE investors when the PIPE transaction has an embedded warrant--- reset rights frequently refer to the exercise price of these warrants • “Price resets” frequently refer to convertible debt or convertible preferred stock and allow conversion at a price or an average of prices at the time of conversion after allowing for a discount

6. PIPE contracts (cont’d) • PIPE issued shares frequently bear the risk of delisting after the PIPE transaction consummation-because of this risk, hedge funds are the most suited investors to buy PIPE issued shares and liquidate them on an orderly basis • PIPE investors typically ask for short conversion horizons in order not to have to deal with a significant PIPE issuer’s stock price decline

7. Future of the PIPE market • During the financial crisis (2008-2009), PIPEs have substituted public equity offerings • Post financial crisis, PIPE have been reformed to entailing newly issued common stock that is pre-registered which increased tremendously the liquidity of this stock and reduced the requested discounts • Post financial crisis, alternative contractual terms that led to better risk management are the following: • Anti-dilution rights, price resets, selling restrictions, investor redemption rights, board seats, additional voting rights, forbidding the concurrent issuance of public equity • Post financial crisis, the investor types that have been active in PIPE investments have still exhibited hedge funds as the main “players”, but also strategic investors started participating in a considerable number of PIPE deals: i.e., other corporations, corporate insiders and venture capital/private equity firms

8. PIPE summary statistics

9. PIPE summary statistics (cont’d)

10. PIPE summary statistics (cont’d)

11. PIPEs vs. SEOs