Private Equity approach to investing in Public Equities (PIPE)

Private equity is traditionally associated with investments in private companies, but the approach is gaining traction in publicly listed companies. A private equity approach to investing in public equities (which we refer to as PIPE), involves taking a more active and hands-on role in managing and improving the performance of publicly traded companies. In this note, we explore the numerous advantages of adopting a PIPE approach when investing in public companies.

A key benefit of the traditional private equity approach is the ability to take a long-term perspective. A longer investment horizon allows for patient capital deployment and a focus on improving a company’s fundamentals rather than chasing shorter term objectives like share price increases. Board and management teams of public companies tend to be more receptive to this form of capital. Establishing a strong and collaborative relationship between investors and executives is essential as it fosters trust, enables effective communication, facilitates strategic decision-making, and ultimately enhances the company’s long-term growth and value creation. Using a PIPE approach, the investor can partner with and have influence in the investee company without having to own more than 50% of the register like traditional private equity.

A private equity approach brings operational expertise of the manager to the table. By actively engaging with the management of a public company and the underlying business, a PIPE investor can provide valuable insights to ensure a disciplined approach to capital allocation. This hands-on approach can lead to significant operational improvements and increased profitability. Additionally, private equity investors are often well-versed in capital markets and are able to provide strategic guidance to the companies they partner with. Typical strategic initiatives will include mergers and acquisitions, capital management strategies (dividends or share buybacks), and capital raising advice.

Whilst public markets often emphasise short-term results (driven by share price movements), private equity investors implement strategies that place a stronger emphasis on long-term, sustainable growth. This can provide attractive buying and selling opportunities in the public markets as these overreactions will create significant dislocations from intrinsic value. The liquidity provided by public markets allows PIPE investors to enter and exit such investments with greater ease than private equity.

Private equity investors look to minimise risks identified during the comprehensive due diligence process. A common downside protection mechanism is to obtain a board position in the companies they invest in, allowing direct influence on corporate governance and decision-making, an approach typically avoided by public market investors. This level of involvement ensures that the investor's interests are aligned with not only the board’s interest, but also the management team.

While the traditional approach of ‘stock picking’ remains popular in public market investing, adopting a private equity mindset can offer a range of advantages. By combining financial resources with strategic guidance and operational expertise, PIPE investors can drive sustainable growth and create value for all stakeholders in the public market. As such, this approach represents a compelling option for investors seeking to maximise returns and positively impact the companies they invest in.