Private Investment in Public Equity.
Huh? What is this? Well, you have a company who has stumbled. They think that, if they can just grow their ferret-breeding division, their gourmet coffee bean margins will grow dramatically and everything's gonna be all right. But their equity or stock is in the tank, trading at a crazy low multiple. So it'd be very dilutive to sell shares to raise cash. And because the company is breakeven and on dicey ground, no banks want to lend them money.
The answer: the private markets, even though this company is public. In fact, one brave venture capital firm wants to buy a convertible note from the company that acts like debt if the company doesn't perform, i.e. they have to pay back the VC a reasonably high interest rate, or the VC owns the company. Or...the investment converts into stock priced 50 percent higher than where the company is trading today, i.e. not as diluative as just selling shares today.
That's the notion of a PIPE, wherein a private company makes a private investment in a public company, usually revolving around a conversion feature into their equity. And let's hope that the hope for those ferrets wasn't something the CEO was putting in a PIPE and...smoking.
Related or Semi-related Video
Finance: What is a Private Investment Co...3 Views
Finance a la shmoop what is a private investment company Shh we are hunting [Elmer Fudd appears from a bush]
profits okay people it's private yes private private means not subject to
the onerous rules of public investing and all that regulation that is when [Definition of a private investment company]
it's only wealthy big boys and girls putting in their dough the presumption [Wealthy people giving money to the market]
is that they have their own lawyers their own risk tolerances their own Ivy
League education and they can figure out the deal on their very own they don't
need mama government training wheels the way the public does in public offerings [The public riding a bike as the stabilisers are taken off]
with publicly traded securities and so on like private wealthy educated
investors get treated differently than Jo farmer who you know just graduated [Guy talking as Elmer Fudd keeps appearing in the background]
high school so who all does this apply to like what's a private investor what
investment vehicles are involved well hedge funds you know those go to private
wealthy investors private equity funds same deal and venture capital funds same
deal why because they go bankrupt all the time you can lose all your money in [Money going down the toilet]
these things all the time and it happens and Joe Q public needs to be protected
from that and there's good and bad because in these funds also you can make [The government saves the public from a fire breathing dragon]
like a hundred times your money if you happen to win the one lottery ticket [Guy next to pile of money from Amazon stock]
that goes up a whole lot and that's what people focus on when they sell them so
Joe Q public at least according to government is to be protected from such
a volatility and there's other investment vehicles beyond these three
that get private attention away from the public but they have vehicles we can't [Elmer Fudd whispering]
tell you about
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