Private investment in public equity market maturing and growing in sophistication: Fasken study

Authors predict this trend to continue to grow, as conflict, inflation, interest rates drive uncertainty

Private investment in public equity market maturing and growing in sophistication: Fasken study
Gesta Abols, Fasken

As the Russian war, resulting economic sanctions, inflation, and increasing interest rates continue to sow uncertainty, a recent Fasken study predicts the market in private investment in public equity ­­transactions – or ‘PIPE' ­– will continue to grow in 2023, given the significant flexibility these transactions offer.

At the beginning of May, the firm released its fourth PIPE Deal Point Study, which examined 2022’s PIPE transactions with a value of above $10 million. The study showed an increase in investor rights, potentially showing their increased bargaining power, and that some of Canada’s largest public companies are showing interest in these types of transactions.

“The key things are that the pipe market remains an interesting and robust financing source,” says Gesta Abols, co-leader of the cross-border and international practice at Fasken. “Given the uncertainty that exists in the market today, it's expected to remain strong, if not grow.”

A PIPE transaction involves a single or small group of investors who will acquire a meaningful percentage of a public company’s securities. These transactions also involve bespoke features such as negotiated shareholder rights.

The study found that 78 percent of the deals involved common equity. Among the most prevalent rights negotiated were dilution protection rights and board nomination, registration, and information rights, which were negotiated in 61 and 44 percent of the deals.

In the deals examined, the rights granted least frequently were redemption rights, both at the option of the issuer and the option of the security holder. These rights were present in 22 percent of the deals.

The average deal value was slightly lower than the four-year average. For 2022, the average was $94.7 million; between 2019 and 2022, the average deal value was $99.36 million.

In one-third of the deals analysed, the investors were Canadian residents. They were from the US in 21 percent of the deals, from Europe in 17 percent, and from “other” in the other 29 percent.

The study notes that the 2022 PIPE deals were “less diverse” compared with 2021, lacking any involving communications, real estate, IT, or “environmental and facilities services sectors.” The authors suggest this likely reflects a “strong rebound” for the materials sector, which stems from a growing realization that mining and metals production are critical to the green-energy transition.

The average market capitalization among target companies was $1.75 billion. This indicates that some of Canada’s largest public companies are showing interest in PIPE transactions, said the study.

The study also shows a shift in the types of securities acquired in the examined PIPE deals. In 2021, only one deal involved convertible debt, while in 2022, 22 percent of the deals did. The 2021 number was a dip from 2019 and 2020, which saw convertible debt present in 42 and 27 percent of the deals. The report’s authors note that the rebound could be due to a stabilizing market, post-COVID, and subsiding cautiousness.

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