THE PIPEs REPORT a service of The Deal

The Deal’s PIPEs Report provides weekly news, data and analysis of small cap equity finance.

Inside The PIPEs Report you will find the most recent news, research and market data on the activity and developments in small cap equity finance. The report coverage includes updates on deal activity, trading and regulatory issues, and potential opportunities in the small-cap market. On a weekly basis, the report provides rankings of top advisors and a wide range of metrics and data for PIPE activity and analytics.



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PE, VC involvement in PIPE market is surging this year

Non-traditional investors have been pumping more capital into private investments in public equity this year, as the amount raised in PIPEs including private equity and venture capital sponsors more than doubled from last year.

Much of the increase comes from investors faced with bubbly valuations in private company markets, where the number of unicorns, or companies valued at $1 billion or more, soared from 12 in 2012 to more than 150 in the current market, according to Bill Siegel, CEO of SecondMarket, a provider of software to facilitate private market investments.

The broader PIPE market showed substantial growth in the same period, with the amount of capital raised growing some 90% to $51.74 billion. But over the same interval, the amount invested in deals including PE and VC investors rose 138% to $6.9 billion.

Data on the PIPE market is from The Deal's data service PrivateRaise, which tracks PIPEs that raise at least $1 million.

PE and VC investors this year include funds managed by VC firms Venrock Associates, Premier Venture Partners LLC, Frontier Ventures LLC, Sequoia Capital, ARCH Venture Partners LLC, Tsing Capital, Triangle Venture Partners LP, Technology Crossover Ventures and New Enterprise Associates.

PE investors visiting the PIPE market this year include funds managed by Apollo Management LP, Capital Z Investment Partners LLC, Bain Capital Inc., Helios Investment Partners LLP and Kohlberg Kravis Roberts & Co. LP.

Other funds manage various combinations of public equity, private equity and venture assets, such as Pamplona Capital Management LLC, Ballyshannon Partners LP Inc., OrbiMed Advisors LLC, Abingworth LLP and Tavistock Group.

The number of deals remained nearly the same in the broader market and in deals with PE or VC investors. So far this year, the broader market consisted of more than 900 placements, about the same number in the period last year. Transactions with VC and PE investors increased slightly from 107 offerings last year to 112 this year.

The average amount raised in offerings with PE and VC investors rose from $27 million last year to $61.9 million.

Investors who usually stick with private companies might visit the PIPE market to get a discount on a public company or simply find a company that is comparable to a private one but at a better value.

In some cases, a fund's charter may prohibit it from investing in public markets, but others have more flexibility.

"A number of PE firms have the opposite problem to the undervalued micro-cap companies they are having a hard time finding attractive opportunities among private businesses and they need to get their capital to work within a defined period (or must return it to LPs)," Accretive Capital Partners LLC managing partner Richard Fearon said in an e-mail.

"The charter of the PE firm depends upon the agreement with their specific LPs, and many of these allow privately structured and negotiated investments into public enterprises," Fearon said.

Taking capital from a PE or VC investor can have advantages or disadvantages.

One market participant noted that negotiations with such investors can absorb too much time, while another suspected that in at least a few cases these investors might actually be looking to take advantage of unstable microcap companies via onerously structured financing.

Yet an alliance with a PE or VC investor could open new doors to investors who could bring strong advisory skills or serve as valuable connections in the future.

"PIPEs and similar alternative investment structures, with a shorter investment horizon than classic private equity and venture capital investments, provide a unique opportunity for private equity and venture capital players to get to know a company and its management prior to making a large commitment or an activist investment," Kelley Drye & Warren LLP partner Michael Adelstein said in an e-mail.

One company that has benefitted from investments from hybrid private/public investors is AxoGen Inc. (AXGN), which has been backed by Deerfield Management Co. and, more recently, Essex Woodlands Health Ventures, which invests in both public and private healthcare companies.

Gregory Freitag, CFO and general counsel of the Alachua, Fla.-based maker of skin graft products, told The Deal that a $17.5 million August PIPE investment from Essex brought a number of advantages, including advice from a knowledgeable partner.

"They have a lot more eyeballs on the Street than we do," Freitag said.

He told The Deal that the Essex's investment brought visibility to the company, which markets had largely ignored even after it announced a substantial increase in earnings this summer. Since the PIPE, AxoGen shares have risen nearly 30%, while trading volume increased substantially, according to Freitag.

Freitag attributes this to markets' recognizing the judgment of a long-standing health sciences investor.

He also noted that the amount of capital committed should be enough for the company to reach cash flow positive status without using time and energy arranging numerous interim financings.

Freitag also said that the relationship between AxoGen and Essex grew over time, and ultimately the transaction did not require a placement agent or banker.

"Essex has known status as a premier medical investor of size, and this brought a greater comfort level on the Street," Freitag said.