What is a Private Investment in Public Equity?

Matt Brady
Matt Brady
Man climbing a rope
Man climbing a rope

Private investment in public equity, otherwise known as a PIPE deal, is a financial agreement in which a company privately issues public securities—stock or other equity—to an investor at a lower price than the market value. This is a technique for the issuing company to raise extra capital. Evident in their name, private investment in public equity deals are arranged privately between the buying investor and the issuer, although company securities are otherwise traded publicly.

While these deals primarily concern either common or preferred public stock, private investment in public equity deals can also trade convertible debt, such as company bonds. Situations in which common or preferred stock is traded are called traditional private investment in public equity deals, whereas sales involving bonds or other convertible debt are understood as structured private investment in public equity deals.

A private investment in public equity can also occur when a private company acquires and merges with a public company. This process, called an alternative public offering, combines a reverse merger with a private investment in public equity. In such an event, the public company's stock is sold to the private company at a discounted rate. These deals can spare a private company that wishes to go public the time and work involved in registering for an initial public offering (IPO). By acquiring a company that has already gone through an IPO, a private company can avoid having to register and deal with its own IPO, while receiving all the capital benefits of issuing stock publicly.

Private investment in public equity deals may also be advantageous for companies that face a difficult time finding new financing. These investment deals can work faster and just as efficiently at raising extra capital than secondary offerings. Secondary offerings occur when a public company issues new stock after an IPO. Private investments in public equity deals are generally more attractive to smaller companies that have a harder time finding new capital than larger, more established companies.

Although abundant with possible profit, private investments in public equity have been a source of scrutiny in some markets. Some scrutiny has resulted from the potential for private deals to be made using illegal insider's information. There is also the risk that by selling discounted securities to a private investor, the value of a company's securities held by public investors could be diluted, thereby unfairly adding risk to the investment of public shareholders that invested at a pricier market value. These deals also come with their risk: it’s possible for struggling companies to fail even after raising extra capital. In such situations, the private investor, company and public shareholders all suffer.

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