Beyond plain vanilla

Lawyers love complexity much as actors thrive on meaty theatrical roles. Thomas Friedmann and James Lebovitz, both Dechert LLP partners, are no exceptions. In faltering credit markets, their publicly traded clients have had to tap innovative ways to raise capital quickly without relying on debt financing. Increasingly, private investments in public equities have been the mechanism of choice, particularly when private equity investors are involved.

Many of the equity-raising attempts "are stillborn, but PIPEs are the one technique that seem to actually close," says Friedmann, 46, who is based in Washington.

While it hasn't exactly been a picnic, Friedmann and Lebovitz have found themselves crafting a number of structured PIPEs similar to those used by investors such as Warren Buffett and TPG Capital when they poured billions into failing financial institutions last year. "PIPEs have taken on a different life with larger deals," says the Yale-educated Lebovitz. "We've seen a convergence between what I'd call traditional PIPEs and private equity terms."

Lebovitz, 51, is a PIPE veteran. A graduate of the University of Virginia School of Law, he started more than two decades ago helping small-cap life sciences outfits that, he says, "always seem to need money." Before joining Dechert in 1999, Lebovitz served for three years as in-house general counsel for FPA Medical Management Inc., a ­publicly traded physician practice management company.

Unlike broadly marketed secondary or follow-on offerings, which generally have an overhang effect on the issuer's stock, plain-vanilla PIPEs are usually common stock offerings marketed to a limited number of investors over a shorter period. More recently, these have been dwarfed by larger PIPEs, which often come in layers of securities -- convertible preferred stock, participating preferred, convertible debt and warrants. And, depending on the size of investment, larger PIPEs come with greater control, including board and committee representation, veto rights, pre-emptive rights, voting or standstill agreements and transfer restrictions.

"The larger the deal, the greater the investor's ability to negotiate for these rights," says Lebovitz, who primarily operates out of Philadelphia, though he makes occasional jaunts to the firm's Hong Kong office.

Last year, the duo advised Whole Foods Market Inc. on a $425 million PIPE backed by Los Angeles buyout firm Leonard Green & Partners LP. The PE shop gets a 17% ownership stake if it is able to convert the preferred shares to common stock.

Earlier Dechert represented Whole Foods on antitrust issues relating to its takeover of Wild Oats Markets Inc. That got Friedmann, a corporate finance specialist, involved in disclosure matters and later on the PIPE. Whole Foods wanted to ensure it had enough dry powder going into a recession. But it wasn't an easy thing, with both sides looking to protect their interests through various structures. Whole Foods wanted to announce the PIPE simultaneously with quarterly earnings results, which meant time was short -- two weeks. Moreover, it looked for a fairly long horizon before the investor could flip the securities, and the economics of conversion had to be right.

In the end, the pair settled on a two-year lockup, longer than most other PIPEs. The securities had some unusual features, including one that permitted Whole Foods to convert the preferred stock instrument into debt through an exchange. Most importantly, they met the deadline.

PIPEs are just one of a gamut of capital-raising tools that preoccupy Houston-born Friedmann, who's often confused with the New York Times columnist. ("I get better tables in restaurants," he quips.) Among clients are beleaguered special purpose acquisition companies and business development companies.

These days, Friedmann, a Harvard College grad and an alum of the University of Virginia's business and law schools, tries to navigate the government's still-evolving Public Private Partnership Investment Program for buying up toxic assets for clients. "I'm looking at two parallel options: a more traditional fund-type structure to invest in assets; the other is a public, REIT-like structure," he says. "Neither of them are perfect, but that's another story."