PIPEs: Value Creation and Investor Identity

Abstract: Based on a sample of PIPE issuances by companies listed on major US exchanges between 2008 and 2013, this paper explores the connection between value creation and investor identity in PIPEs. In a novel study, the paper compares the target selection of hedge funds and private equity funds and monitors their subsequent effects on value, both at a shareholder and at a business level. We find that hedge funds target smaller, riskier firms, while private equity funds engage with more stable firms. These potentially different investment strategies do however not translate into significantly different deal announcement returns. Instead, we find evidence for the importance of issuer characteristics and monitoring and certification effects beyond investor classification. Since private equity investors focus on aligning the incentives of management and shareholders, engage in financial engineering and outperform hedge funds in terms of operational improvements in targets, they seem to emulate the traditional LBO investment model in PIPE transactions. In contrast, hedge funds appear to have a monitoring role, mitigating agency conflicts and saving severely distressed firms from collapsing. We conclude that, while both issuer characteristics as well as investment approach matter for value creation, a simple classification of investors into hedge and private equity funds has little explanatory value.