PIPE deals seen as efficient way to deploy capital in struggling economy, Fasken lawyers say

As Canadian companies struggling with the impact of Covid-19 on the global economy look for ways to stay viable, and investors search for the best way to deploy capital, there’s been a growing market in the country for PIPEs, or Private Investments in Public Equity. And at a time when PIPEs are being more seriously considered as an option for raising capital, corporate law firm Fasken has published the first-ever analysis of the capital-raising and investment tool.

For a distressed publicly traded company, a PIPE “could provide a lifeline” for these companies to stay solvent, says Gesta Abols, one of the survey’s other co-authors and co-head of the firm’s US committee.

He says the capital-raising vehicle, through which investors such as private equity or hedge funds negotiate directly with the public company for a stake, is especially attractive during what is perceived as a relatively short-term crisis like the coronavirus pandemic. It provides “an alternative to taking on more debt or selling the company while the market is at a low,” he says. The company is “hoping that it can return to normal, especially when it’s not a good time to put up a time saying it’s for sale.”

PIPE transactions have been on the rise in Canada since the 2008 financial crisis, says Fasken partner and study co-author Grant McGlaughlin. He says companies, whether they are distressed or not, increasingly see PIPEs as an efficient, faster, and less costly way to raise capital.

Recent PIPE deals involving Canadian companies include Washington-based Durable Capital Partners investing US$150 million in FirstService Corp., and Brookfield Asset Management acquiring US$250 million worth of preferred shares in Superior Plus Corp.

“These deals can typically be done quickly,” McGlaughlin says, usually through private placement, and there is no lengthy prospectus review process, no marketing roadshow and chatting up investors. “It’s a one-on-one negotiation,” he says, “with more certainty of getting the deal done” than, say, a secondary offering in a volatile market. Often the investor in the PIPE has followed the company and knows it well.

PIPE deals are done at a discount to the company’s share price on the public market, McLaughlin says, but usually only a haircut of between five and 10 per cent.

For investors, going the PIPE route can potentially offer significant upside, while also providing downside protection through provisions such as convertible debt or preferred shares. Investors also typically gain additional rights, such as seats on company boards, or the right to participate in any future capital raise to maintain their stake in a firm.

McGlaughlin, who is also co-head of Fasken’s private equity group, adds that among those industries likely to see a spike in PIPE deals are those especially hit hard by the current economic contraction, including energy, retail, hospitality and real property.

A PIPE deal might be a much needed shot in the arm for a company in financial trouble, but Abols says the way the deals are typically structured, the investor gets to participate in the company’s potential upside. A traditional PIPE agreement lets investors purchase common stock or preferred that is convertible to common shares at a predetermined price or exchange rate.

Fasken’s PIPEs survey, which the firm says it plans to update each annually, provides an analysis of 19 Canadian PIPE deals completed in 2019, each with a value of at least C$10 million.

Among the survey’s key findings:

• a majority (58 per cent) of the deals involved Canadian investors
• the materials sector received the most investment (32 per cent), followed by consumer products (26 per cent)
• the average deal value was C$85.90 million
• the average market capitalization of the targets was C$519.59 million
• Over 50 per cent of the deals involved the issuance of convertible securities
• The most prevalent rights negotiated were board nomination rights (approx. 77 per cent of deals surveyed), followed by anti-dilution protection (approx. 63 per cent)
• Information rights and ancillary business rights were also common (approx. 53 per cent and 50 per cent, respectively) 
• The least common rights granted were specific voting rights, which were only included in approx. 21 per cent of deals surveyed.

Both Fasken lawyers forecast that this investment will “be part of the survival toolkit” for companies during the current upheaval. For both sides of the equation, says Abols, there are "compelling reasons" to use PIPEs as an instrument to right the balance sheets of struggling companies and provide an opportunity to investors.