More to it than meets the eye

PIPE deals – private investments in public equities – are emerging as one of the more popular structures to put capital to work in a world without leverage. But they can give limited partners cause for concern. Why should investors be paying two-and-twenty in fees for someone to watch a publicly listed stock gyrating up and down with the markets?

At the end of June, London-headquartered buyout firm BC Partners (BCP) executed its maiden US deal: a $350 million PIPE in Office Depot, an office supplies company listed on the New York Stock Exchange. The deal, which saw BCP acquire $350 million-worth of convertible preferred stock, resulted in the buyout firm taking a 20 percent stake in the business.

On close inspection, the deal goes beyond just a big punt on a listed stock to provide a good example of a firm bringing to bear a private equity-style management influence on a publicly quoted business.

Following the transaction, BCP is entitled to three seats on Office Depot's board of 14, guaranteed seats on three of the four standard committees and allowed observer rights on the fourth committee. Furthermore, the buyout firm has negotiated a package of enhanced information rights and vetos over certain management and financial aspects, such as new debt incurrence, capital expenditures, acquisitions and disposals.

In terms of management control, BCP has achieved as high a level of control as can be expected over a listed entity. Does this mean we will be seeing a rash of PIPEs from the firm? “I don't think PIPEs will provide a regular source of investment, because it is not control and that is definitely a departure for us,” says Jamie Rubin, a senior partner at BCP in New York who now sits on the Office Depot board. “We are going to be awfully discriminating about how many of these we do, but you'll probably see other creatively structured control investments.”