Tuesday, March 3, 2009

VIPEs -- Everything Old is New Again for Venture Capital

If you are looking for what's hot in venture capital investments, look no farther than VIPEs. All of a sudden, I am seeing a number of VIPE deals either being done or being talked about. Although I am only a single data point, I am at least seeing a trend.

What is a VIPE you may ask? Well, I am glad you asked. More below the fold.

With IPOs, mergers and other traditional exit strategies on a sharp decline, particularly in the tech and biopharma industries, enterprising venture capitalists have had to adjust their expectations and have been looking for opportunities to invest in already-public companies that are dramatically undervalued as a result of the market downturn. These public companies, unable to obtain credit on favorable terms and faced with the market’s growing hostility towards secondary offerings and other more conventional types of financing, find themselves in dire need of capital in order to execute and grow their business plan. As a result, struggling public companies and eager venture capitalists have turned to VIPE financing transactions, that is Venture Investment in a Public Equity.

A VIPE is very similar to the more common PIPE transaction (Private Investment in Public Equity) -- an investor is buying shares of a public company, but the investment it is not made through a registered public offering. Instead, it is done as a private placement of some type, usually (for PIPEs) with the public company on the hook to do a public offering of the shares in the future.

In a typical PIPE transaction, the PIPE investor is focused on the trading volume and liquidity of the stock of the public company and has a short term horizon in which to sell and turn a profit. A VIPE transaction, on the other hand, is more often made with a longer term in mind, say two to three years or more. The venture capital firm is willing to invest in a public company, instead of its usual private company asset class, because of the potential returns the VC sees in the public equity long term. The heightened disclosure obligations of public companies make it an easy task for a venture capital firm to diligence a number of potential targets at a time, identify those which are sharply undervalued as a result of the current economic climate and/or have strong prospects for the future. The VC then make his investment at a 10-15% discount on market price -- typical of VIPE transactions.

A potential sticking point for some VIPE deals comes up in transactions where the VC, used to receiving the rights and protections typical in private placements of preferred stock (such as a board seat, rights protections, etc.), attempts to get the same sort of protection from the public company in which they are making their VIPE investment. Trying to work these protections into a VIPE transaction presents a host of issues with federal securities laws, listing requirements and general corporate governance directives, and require creative drafting and approvals.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.