PIPE deals

This is about a type of financing for quoted company called PIPEs.

Just a little bit of background....

PIPE stands for Private Investment Public Equity here is what Wikipedia says on the subject:

http://en.wikipedia.org/wiki/Private_investment_in_public_equity

Over the years I have spoken to a number of investment houses in the PIPE arena. They have key criteria for such a deal which from the lenders perspective could be summarised as follows:

1) The PIPE lender should be fairly sure (read convinced) it will be able to reclaim the lent funds as quickly as possible by selling shares in the market (taking into account whatever special covenants are put in place). In other words the funds lent will be put to good use straight away and will start creating shareholder value which will cause the share price to rise and give them something to sell into.

2) Most PIPE lenders are also investment companies. Once they have sold enough shares to reclaim the amount lent and usually a bit more to cover a "notional" interest rate they will be sitting on a shareholding in the target company which is to all intents and purposes "free carried."

3) They see the strong possibility of continued share price appreciation coupled with limited or no further dilution moving forward to give them further wealth creation opportunities by holding the "rump" of the free carried shares issued under the PIPE deal but not yet sold.

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So hypothetically speaking if a small cap mining company had entered into such a deal recently and the bid side in market depth was very strong and full of bidders waiting  for the PIPE lender so sell further shares to them there is a very strong chance they will be extremely disappointed as the PIPE lender is no longer selling as it awaits further news driven share price appreciation which will boost the value its now "free carried" holding.

Once the penny drops as it were those bidders in market depth would then have no option but to fill their positions by taking out the offers as sitting in bid depth is getting them nowhere.

All hypothetical of course, can anyone suggest an ASX quoted company to which the outlined scenario could apply based upon bid depth this week?

Even though this post is not about Metallum it is in the Metallum thread so in keeping with HC guidelines I should point out that I am a partner in Empire State Capital Partners who have issued research on Metallum.

EB