The Re-Emergence of the PIPE Deal

Written By Darrell Peterson and Gordon Cameron

Volatile stock markets, COVID-19 and the oil price crash, along with billions of dollars in unallocated investment capital, have combined to create a unique public company investment opportunity in Canada. The economic fallout from these events have left many publicly listed companies in need of new capital, while investors (such as Private Equity funds) are looking to deploy capital in an investment climate where it is difficult to conduct traditional "buyouts". In the spring and early summer of 2020, this trend played out in the U.S. with high-profile private investments in public equity (PIPE) deals such as Madison Dearborn Partners' investment in Evo Payments, Roark Capital's investment in The Cheesecake Factory and Onex's investment in Emerald Holdings. In the U.S., the PIPE market saw $8 billion worth of deals in April 2020 alone, far ahead of an average month a year before, and some commentators have projected a more than 30 percent increase of PIPE activity for 2020 overall.

In Canada, Washington D.C.-based Durable Capital Partners LP invested US$150 million into FirstService Corp. and Brookfield Asset Management Inc. acquired US$250 million of preferred shares in Superior Plus Corp. These transactions signal a re-emergence of PIPE deals in Canada.

What is a PIPE Deal?

PIPE transactions are private placements of securities issued by public companies that are usually significant, but still minority, investments. In most cases, PIPEs are offered to certain accredited investors, including institutional investors, private equity investors and strategic investors.

Who is a Typical PIPE Issuer?

An issuer that needs to raise money in circumstances where it may not be able to do so by way of a public offering, including (i) issuers in financial distress (or otherwise seeking to improve their balance sheet), and (ii) issuers who may not have access to institutional investors because of low market capitalization and a small trading float. In addition, issuers whose share prices are being driven lower by global circumstances or unusual volatility may find that the public markets are not currently conducive to a broad capital raise.

Who is a Typical PIPE Investor?

Traditionally, PIPE investors have tended to be public market investors that focus on short-term investments. More recently however, private equity investors have shown an interest in acquiring substantial minority positions if the issuer is a strong company, established in one of the industries that the investor has experience in, and is one where the investor may be able to negotiate some control rights.

Advantages of a PIPE Transaction

A PIPE transaction offers several advantages for an issuer, including:

• can be completed relatively quickly;
• transaction expenses lower than the expenses an issuer would incur in connection with a public offering;
• minimal involvement of any Canadian securities commission;
• marketed and completed on a confidential basis. (e.g., disclosed to the public only after definitive purchase commitments are received from the investor); and
• the issuer may be able to expand its base of accredited and institutional investors and may develop a strategic relationship with a large, well-funded shareholder.

For an investor, advantages of a PIPE transaction include:

• the ability to receive a discount to the current market price in order to compensate for the initial four-month statutory hold period;
• the ability to negotiate governance rights and protections, such as board seats, anti-dilution protection, pre-emptive rights, registration rights, or veto rights; and
• upside if equity bought at a discount based on broad market factors (e.g., a well-run company with a depressed price due to poor general market conditions).

Further Information

To assist interested parties in navigating a PIPE transaction in Canada, Bennett Jones has prepared Key Considerations for Private Investments in Public Companies (PIPEs) in Canada. If you would like to discuss going-private transactions further, please contact the authors or any member of our Private Equity or Corporate Finance teams.

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