PIPE Investors and their role in the future of SPACs

Special Purpose Acquisition Companies (SPACs) have risen in popularity since 2019 as a viable alternative to IPOs due to their ability to rapidly set up and consummate while ensuring transparency in pricing and capital.

The momentum in which SPACs entered the market and boomed has been a resurrection for growing privately held companies. During this SPAC 2.0 boom, investors raised large sums of money in the public markets, followed by deals to buy emerging companies for over 10x the capital raised plus rollover equity. This was supplemented by cash from PIPE.

Simply put, PIPE stands for Private Investment in a Public Entity. To facilitate a more significant monetary commitment from the PIPE investor, these investments usually came at a discounted price or contained an irresistible clause.

SPACs have noticed the opportunity that PIPEs present in assembling capital over a short time to capitalize on de-SPAC mergers. The fact that PIPEs do not need SEC review and approval to set up further cement the advantage of a PIPE deal.

SPACs are likely to become a permanent part of the capital markets landscape, and now, PIPEs offer an entry that seems very lucrative and promising.

SPAC 2.0 and the Role of a PIPE Investor

SPAC 2.0 is essentially the offspring of a happy marriage between a loaded SPAC vehicle and a private investor raising funds. This brainchild is a privately-held emerging growth company in the form of a PIPE.

The SPAC 2.0 structure is a lucrative investment for many, with the PIPE investor leading the pack. Here is why:

  • Public exit for the emerging growth company without the hassle of having to go through a traditional IPO
  • A rapid on-the-spot valuation of the emerging growth company based on a three-year financial projection
  • Listed stock, credibility in the markets due to a listing in the stock exchange, and additional capital in the balance sheets for the emerging growth company empowering its ability to get publicly acquired
  • The leeway to negotiate for immediate liquidity on behalf of the stockholders in the emerging growth company
  • Ability to secure long-term liquidity due to being a part of the public trading market
  • Access to lesser-known but high potential emerging growth companies by SPAC stockholders and PIPE investors
  • The means for SPAC sponsors to rent out their names, network, and prestige and get a quick exit.

With the appointment of a new chair to head the SEC, a SPAC transaction was not simple anymore. The new SEC Chair Gary Gensler announced a compliance review that questioned pending transactions, warranted modifications in the SPAC blueprint, and delayed de-SPAC deals.

With PIPE investors taking center stage in determining deal-breakers and makers, their role has become more significant. PIPE investors ensure deal viability through certainty of transaction terms and lucrativeness based on adjusted valuations with a horde of fresh capital.

With the whip in a PIPE investor’s hand, how much they want and how much they will pay have become the determinants to success in the SPAC market. Hence, in the SPAC 3.0 cycle, this makes the PIPE investor the new ringleader.

Get in touch with an XBRL expert to find out how we can help companies to go public in the SPAC route.