In the PIPEline

3i made headlines when it floated 3i Quoted Private Equity Limited (3i QPEL) in June 2007. With the mandate to acquire influential stakes in and bring private equity value creation techniques to quoted companies, the vehicle seemed innovative. However, the fund is currently trading at a discount to net asset value. "This is slightly disappointing, but not uncommon for listed private equity vehicles, particularly in the current market environment," explains 3i QPE managing partner Bruce Carnegie-Brown*.

CapMan is another firm that has launched a PIPE division and has recruited Jukka Ruuska, a former president of the OMX Nordic Exchange, to set it up (see people section, page 10). CapMan's CEO Heikki Westerlund explains: "Take-privates are very complex and difficult to complete, but we see the potential of employing the private equity model to listed companies and therefore we will launch a PIPE initiative to capitalise on this". He continues to explain that the process is still in its infancy, but the completion of the fundraising of a new vehicle to invest in public companies is expected to be completed in 2008. A target for the fund is still not set, nor is the amount of companies it will invest in. However, what has been determined is that the fund will be focused on CapMan's existing markets, Finland, Sweden, Denmark and Finland. "We will have a separate team that will be responsible for raising the fund and find suitable targets," says Westerlund (but he explains that it is still too early to reveal the specifics of the fund and the process). Ruuska is in the process of assembling a team and determine the way forward.

Competition and hedge funds

The credit crunch has meant a shortage of capital, which in turn means more private equity firms could begin to look more closely at PIPE deals. "We see more opportunities in the market now than in the pre-credit squeeze environment and we have not seen much direct competition so far. However, we expect that more buyout houses are moving our way," says Carnegie-Brown. Westerlund agrees: "We expect more private equity firms move in this direction."

Hedge funds are also keen PIPE investors. "We anticipate that we will meet some hedge funds, but the style is different and therefore we are well prepared to face such competition," says Westerlund.

The PIPE challenge

PIPEs pose different challenges than investments in private companies. "Since a listed company's activities are monitored on a daily basis through its share price, the public market is less forgiving than in the private sphere, where you have room to operate more freely," says Carnegie-Brown. But it is not only here that PIPEs face difficulties. PIPE transactions have been the subject of increased scrutiny by the Securities and Exchange Commission since it uncovered broker-dealers shorting shares prior to flooding the market with stock from PIPE transactions with a view to drive down companies' share prices and take profits. In the current down-market, global shorting has reached new heights, and the New York Stock Exchange says $16bn NYSE-listed shares were sold short as of 31 March 2008. A year earlier, this number was $10.5bn. At the top of the last bull market in 2000, only about $4bn shares were sold short. The current market sentiment is that public companies are likely to lose value, and brokers and traders could possibly persist in distorting PIPE deals. "We see the current market trends as an opportunity to invest in public companies at a possible lower price than a couple of months ago, but the decision to invest in public companies is a long-term decision and is not a reaction to the back-drop in the market," says Westerlund.

Outlook

So what is the way forward for PIPEs in today's market? "3i QPEL is not restricted to certain sectors and geographies and it seeks opportunities in companies that are less researched by equity analysts and which have an equity shortage. It also seeks targets where it can have a significant impact on the operational side and work closely with the management," explains Carnegie-Brown. Typically, stakes between 20-30% are preferred, enough to get a board seat but under the shareholding threshold where a mandatory offer has to be made. 3i QPEL looks to be substantially invested by the end of 2008. "We have secured four deals and are hoping to secure up to 10 more. We remain excited about the opportunities in the market," concludes Carnegie-Brown.

* Listed private equity funds are trading at 20% discount on the LPX 50, a global index that measures the performance of 50 Listed Private Equity (LPE) companies.

Recent European PIPE transactions

In the Nordics the most notable PIPE so far this year was Altor's investment in AGR Group (April 2008, page 35). The investor acquired a further 19% stake, increasing its shareholding to 45.66% and it is set to stage a full take-private of the business if the shareholders approve the offer. If the bid is accepted, it will be the second time Altor owns the oil equipment and services business. The investor floated the business in 2006 after completing an MBO in 2004 (October 2004, page 17).

In the Dach region, PIPEs are also in fashion. Just in the past two months, Lion Capital acquired a 32% stake in Hiestand Holding AG from New York-based Focus Capital, a publicly-traded food products company, listed on the SWX Swiss Exchange; and Investcorp Technology Partners secured approximately a 25% shareholding in Utimaco Safeware AG, a data security business, for roughly EUR40m. See table for an overview over recent European PIPEs.

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