How PSPC Buyout Funding Became Wall Street’s New Favorite Business

For most investors these days, it’s literally a “PIPE dream”.

PIPEs, or private investments in public stocks, are mechanisms that allow companies to raise capital from a small group of investors outside the market. But as PIPEs are increasingly deployed in conjunction with a wave of PSPC mergers, a larger group of fund managers are looking to access that security, with limits on who and how much can invest.

While PSPCs, or special purpose acquisition companies, will use public markets to raise capital to fund a future takeover, PIPEs are awarded to a small group of investors. Managers of funds participating in PIPE will sign a nondisclosure agreement, with trade restrictions, and be brought through a proverbial “wall”, where they will receive important, non-public information from PIPE about the target they seek. gain. They are then allowed to choose whether or not they want to invest at the PSPC IPO price – or sometimes at a discount – and profit from what they hope will be a pop when this takeover is announced.

Bankers at several companies told CNBC they had recently received increased interest from investors looking for future PIPE opportunities.

“Many of these transactions are working very well and were well received in the post-announcement period,” said Warren Fixmer, who heads SPAC Equity Capital Markets at Bank of America. “So the alpha generation she represents obviously attracts a larger group of investors.”

In 2020, PIPEs generated $ 12.4 billion in additional capital to help fund 46 PSPC mergers, according to data pulled by Morgan Stanley. Their data looked at PSPC transactions with valuations over half a billion dollars. On average, PIPE’s capital added almost three times as much purchasing power to PSPC, Morgan Stanley said. For every $ 100 million raised through a PSPC, a corresponding PIPE added an additional $ 167 million, the data showed.

Some of the biggest PIPEs have exceeded $ 1 billion and have been committed in recent months. The latter was announced Monday morning, with Foley Trasimene’s takeover of Acquisition Corp. Alight Solutions, which included a $ 1.55 billion private placement. Another Foley SPAC used a $ 2 billion private placement, announcing a deal to buy Paysafe in December. Chamath Palihapitiya’s SPAC, Social Capital Hedosophia V, deploys $ 1.2 billion PIPE to acquire SoFi. In addition, Altimar Acquisition Corporation announced an agreement with Owl Rock and Dyal to list the combined alternative asset manager on the stock exchange with a PIPE of $ 1.5 billion.

More engaged PIPEs will lag behind PSPC’s IPOs, meaning that if 2020 was the year of the PSPC push, 2021 and 2022 will be when these vehicles merge.

Morgan Stanley data showed that there is still more than $ 90 billion of “dry powder” left to deploy to acquisitions in the next two years or less. This implies that a total of $ 117 billion in PIPE capital is expected to be raised as part of the PSPC mergers during this period, Morgan Stanley said.

Against this backdrop, potential PIPE investors are hiring placement agents en masse and seeking to be included in funding these mergers, bankers from three separate companies told CNBC.

The increased prevalence of this product raises concerns about the potential lack of understanding among the larger cohort of PSPC investors about how these investments work.

“There are two generic losers, or people at risk: the first are existing shareholders, but the second is the perception of fairness in our financial markets,” said Harvey Pitt, former chairman of the Securities and Exchange Commission. “People who are unaware of the disclosures, people who cannot take advantage of these price discounts and people who see the the strength of their holdings has been downgraded due to what we call dilution. ”

PIPE investors typically receive their securities at least at a discount to the market price and sometimes they even get stocks below the IPO price. About a third of PSPCs in the 2019-2020 merger cohort that issued shares in PIPEs sold those shares at a 10% or more discount from the IPO price, according to a recent PSPC study. from Stanford Law School and New York University School of Law. This may ultimately be dilutive for investors who acquired shares during the IPO of PSPC.

A key question, Pitt said, is what types of disclosures investors in PIPEs receive compared to those in the wider market. While he notes that it would be “very appropriate” for PSPC to share potential merger plans or things of that nature, other details about the company’s future might be a gray area. .

But proponents of PIPEs say they serve as a validating signal to the market and can therefore improve performance. According to Morgan Stanley, 2020 PSPCs that included PIPEs had a median performance of 46%, one month after closing their transactions. Those who do not have a PIPE recorded half-less earnings (21%) over the same period.

But once PIPE investors are eligible to sell, it can put pressure on the overall stock by widening the float. Usually, this takes place within weeks of a PSPC trade closing – much shorter than the typical IPO block.

Because of these factors, PIPEs could be an area that merits further regulatory scrutiny this year, as investors begin to better understand the rules and the potential financial impact of these securities compared to public stocks in PSPCs.

“It’s not illegal to engage in any of these deals, but there are, shall we say, minefields throughout the process that could turn what might be legal into something illegal or cross that line, ”said Pitt, who currently serves as the CEO of Kalorama Partners, a consulting firm. “That’s why there needs to be careful scrutiny, and that’s why there is such scrutiny in these transactions.”