By  on July 23, 2007

Uncertainty in the financial markets is making the timing of launching an initial public offering challenging. So some companies are dusting off an old method of share placement called "private investment in public equity" or PIPE.

Most of the firms doing PIPEs are biotechnology firms, but a few apparel and retail companies have done PIPEs, including The Wet Seal Inc., Wilson's The Leather Experts Inc. and Whitehall Jewellers Inc. PIPEs typically involve a private equity firm or other investor buying a company's stock at a discount. The company who sells the private placement stock does the deal as way to raise money.

Gilbert Harrison, chairman of Financo Inc., the investment bank that worked on the Wet Seal, Wilson's and Whitehall PIPEs, said, "A PIPE can be used for growth, restructuring and capital to fund for an acquisition. Much depends upon the bylaws of the companies, which will determine whether it needs shareholders' approval or what other requirements are necessary."

Harrison noted, "PIPEs are a very helpful technique for providing funding for companies. A lot of people like it because PIPEs are easier to do. There are regulatory filings with the Securities and Exchange Commission and they can be done fairly quickly."

Harrison was quick to note that there are some detractors. "Some don't like it because they are giving a big chunk of the company away to one party. There are always questions about control that come up. It depends on the company because each situation is different. I've found that the people doing it most of the time still retain control of the company."

PIPEs, because they are private placements, can find investors from any number of sources. Those who invest are typically private equity funds, institutional investors and hedge funds.

And while companies contemplating a PIPE may possibly be giving up some semblance of control to a major shareholder that will have influence on the company, Harrison believes the finance vehicle is one that is worthy of consideration.

"The basic premise is the phenomenal opportunity for a company that needs funding to be able to achieve its goals on a fairly fast, but limited, basis," Harrison said.John J. Borer 3rd, chief exective officer of investment banking firm Rodman & Renshaw, whose firm specializes in PIPEs, pointed to American Apparel as the latest apparel company to utilize a form of private investment using a SPAC, or special purpose acquisition company, as a vehicle for going public through a reverse merger. In the case of American Apparel Inc., it agreed to be acquired by Endeavor Acquisition.

Borer said that determining which vehicle to use has much to do with one's confidence of getting to market. "It is easier using a PIPE coupled with a reverse merger....An initial public offering involves significant time and effort, and there is uncertainty of the market when it is time to go out and sell the stock. In the case of American Apparel, being acquired by Endeavor, the SPAC, accomplishes the same thing, but on a faster timeline," the ceo said.

One big plus is confidentiality. Until the time the merger is announced, there's no disclosure requirement and everything is done "behind the scenes." Borer said had American Apparel elected to do the IPO route, "It would have been required to file a registration statement with the SEC and then everybody would know how good its business is, how much the executives make and sometime later if the market is right the company can complete the IPO. The problem is that if it can't do the IPO or suspends IPO activity, by then everybody would already know all about them," Borer said.

Borer said the use of PIPEs has increased in the last three years, with the base of investors willing to get involved by providing capital for funding also growing due to hedge fund activity and private equity money.

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