European PIPEs — which have experienced an uptick due to COVID-19-related market volatility — present unique structural, informational, and governance considerations for private equity investors.
European private investments in public equity (PIPEs) have historically been rare, particularly compared with the US. However, since the onset of the COVID-19 pandemic, companies have sought to access additional sources of liquidity to repair their balance sheets. For example, in May 2020, Clayton, Dubilier & Rice invested £85 million in UK-listed building supplier SIG for a 25% stake and two board seats, as part of a £165 million fundraising process to rebuild the company’s capital base — underlining the demand for private capital in the present environment and the willingness of PE to pursue PIPEs.
Market volatility due to COVID-19 could further drive these deals, as public companies seek funding and sponsors search for opportunities — with a significant uptick in opportunities possible over the next 12 to 18 months if economic instability continues. However, PIPEs present unique challenges for PE investors, including structure, information, and governance considerations.
Differing European Structures
Across Europe, different public company rules and acquisition mechanics apply. In Germany, a private placement of up to 10% of shares is permitted, with no prospectus required. In the UK, a subscription for new ordinary shares alongside existing shareholders, through a placement, is the most widely used structure. While jurisdictions such as the UK have temporarily increased thresholds for non-pre-emptive offers (now up to 20%), PE acquirers seeking more significant stakes face additional hurdles, including prospectus requirements and shareholder votes, or if crossing the 30% threshold, triggering a mandatory takeover offer.
PE firms are often keen to explore additional structures. Equity warrants can offer significant upside in the short-to- medium term, but public companies tend to be opposed, preferring longer-term financial commitment to the company over
short-term investor gain. In some cases, PE firms can also provide debt financing to a public company, aiding the restructuring process and de-risking the downside. Overall, public companies are increasingly willing to entertain investment from private investors if accompanied by an offer to existing shareholders through a rights issue or open offer. This can help to obviate any negative shareholder sentiment (particularly from retail shareholders) that may otherwise arise on a dilutive investment by a PE fund.
When conducting due diligence for a PIPE transaction, deal teams will need to get comfortable with a reduced level of information relative to a private M&A process. Any information not in the public domain that is shared with a PE firm will need to be cleansed in a prospectus or public statement — causing reluctance among management to share business plans and projections.
Finally, flexibility is required in relation to control issues, including appointments and exit. While minority shareholders have rights to appoint directors and representatives to board committees (and hold information rights), generally a UK public company board must maintain a majority independence balance. Accordingly, PE firms will not benefit from board-reserved matters as they would in private deals. Furthermore, a lock-up period is common for the equity investment, curtailing the ability of the PE investor to exit for a period of time.
Our view is that PIPEs will remain rare, but they are definitely not just a dream.