Private investments in public equities (PIPES) are a little-used financing alternative in the UK, but a new article by Baker MacKenzie London partners Nick Bryans and James Thompson in this month’s International Financial Law Review (IFLR) suggests that need may outweigh the huge cultural and regulatory hurdles. PIPES have only sparingly been used (recently by Aston Martin, for example), ‘principally due to the importance the UK investor community attaches to pre-emption rights,’ the article begins. Main market restrictions at the 15% and 30% investor level for listed companies are problematic, and traditionally the private capital community has demanded antidilution, veto, and other rights that have led issuers to view PIPES as a financing source of last resort.
But, having spent down their revolvers, or facing broader liquidity concerns, Bryans and Thompson told IFLR that ‘a number of factors support [use of PIPES currently]; record levels of dry powder globally are waiting to be deployed; traditional debt markets are facing material disruption as both borrowers and lenders face mounting financial pressure … and valuations of listed companies are currently at a historic low point for companies in many sectors’ and finally, as a result, institutional investors may now be willing to soften their ‘tough stance’ on pre-emption rights.
Should the use of PIPES increase in the UK, business valuers will experience more complexity in assigning values to differing share classes, since, despite the supposed ‘softening,’ large share blocks held by institutional investors are likely to continue to hold significant additional rights. This allocation of enterprise value could be an increasing factor for fairness opinions and goodwill impairment tests, as well as for general audit-related business valuations.
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