PIPE's Are Profitable

BY William Cate

PIPEs Are Profitable
By
William Cate

PIPEs are a basic merchant banking investment strategy. They are far less risky than the standard venture capital speculation strategy. PIPEs offer a faster profit with far fewer lost gambles. Angel investors can slowly amass great wealth with a PIPE speculator policy. Merchant banks have been doing PIPE-type speculations for over a century.

PIPEs are Private Investment in Public Equities investments. The investor buys greatly discounted stock in a public company. They hold the shares for the legally required period. They sell the shares and take their profit. Given that the discount on a PIPE financing is usually 60%25 to 70%25 off the trading price of the shares, profit seems assured. If the stock holds its share price beyond the legally required hold date; the investor earns at least a 60%25 return on their risk capital. If the share price goes up, the profit margin improves accordingly. The investment risk is what happens if the share price goes down. The investor could lose their money.

Most merchant banks do PIPEs with shares of major public companies. The risk, over a one-year period, of the share price of these large companies dropping 60%25 is small. For the most part, angel investors are limited to PIPE shares of public companies that trade the Over-the-Counter (OTC) and the Over-the-Counter Bulletin Board (OTCBB) markets. The risk of these companies failing, within one year, is relatively high. A wise angel needs more than just the PIPE discount to justify the risk of doing a PIPE financing on a public company that trades the OTC/OTCBB.

A quarter century ago, Beowulf Investments got its start as a merchant bank doing PIPE seed share financings of Canadian public companies that planned to list their shares in the States, once they were trading in Canada. The Canadian hold period for seed shares followed these guidelines. You could sell 25%25 of your shares when the company was called for trading. You could sell the next 25%25 of your shares 90 days after the company started trading. You could sell the next 25%25 in 180 days. And, you could sell your last 25%25 in 270 days. It took less than two months to list a company in Canada. For the most part, we did the PIPE at ten cents with the Primary Price to be forty cents. We picked our PIPE targets on the basis of the promoters past ability to place shares in the States. The process reminded me of a Keystone Cop slapstick comedy. Beowulf Investments and the Canadian promoters were selling as much stock as possible as quickly as legally possible. PIPEs were profitable. We made money on every PIPE speculation. Anything this good had to end. It did in January 1985.

PIPEs For Angels Today

In the past two decades, my PIPE policy has evolved. We no longer play the Keystone Cops by keeping the insider shares out of the Market. We take less of a short-term profit. We avoid promoters. And, we want more control over the stock game. The following are seven of our many PIPE rules.

1. Insiders can't sell any shares as long as we hold any shares of their company's stock. Usually, we do this by requiring a Pooling and Vaulting Agreement.

2. We invest in companies making money. This policy doesn't do anything to help the share price. It does ensure that the company will be around longer than we hold their stock.

3. We don't invest in U.S. Domestic companies. Debt-load for American Companies is almost always far too high as is executive compensation.

4. Our PIPEs supply expansion capital. We don't fund R%26D, exploration costs or the costs involved in rolling out a new product or service.

5. We are seeking companies with a desire to become multinational corporations. The advantages that any multinational corporation has over its domestic rivals are so great that this should be every domestic company's goal.

6. We want our PIPE companies to adopt the CISCO expansion strategy. This means that they will use their shares to acquire operating companies and evolve in 5-7 years to be hundred million-dollar companies.

7. We want our risk capital returned. However, we will invest our paper profit and bet that the company will achieve its global vision and by acquired by a larger company in 5-7 years.

We have more rules, but these should give you an idea of what we are doing. As in 1985 in Canada, the legal rules could change at any time and end our profitable run. Until then, PIPEs are profitable.

If you are an accredited investor that took a few math courses in college, you should realize that the venture capital investment formula makes it mathematically impossible to consistently profit over time funding startup and early stage companies. You might want to visit the Global Village Investment Club website [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] and see if our PIPE formula makes more sense to you than losing your money with the traditional venture capital strategy.

He is the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/]. He's the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] He's a Venture Capital %26 Equity Finance Consultant
[http://home.earthlink.net/~beowulfinvestments/williamcateventurecapitalampequityfinanceconsultant/]

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