Financial Contracts in PIPE Offerings: The Role of Expert Placement Agents

Abstract

PIPEs are an important source of financing for many companies, yet controversial due to their harsh contractual structures. We present a detailed study of how PIPE contracts allocate contingent cash flow rights between investor and issuer. We study the role of placement agents in PIPE contract designs. We find that issuers advised by high-ranking “expert” agents agree to more investor-friendly contract terms than issuers advised by low-ranking “non-expert” agents. This result cannot be explained by endogenous matching because expert agents match with larger and higher quality issuers, which have less investor-friendly contract terms. Instead, this result can be explained by the argument that expert agents help their issuer-clients understand the payoff consequences of negotiable terms. As more direct evidence of this agent role, we show that issuers who share the same placement agent use similar levels of investor-friendly terms. Moreover, we find that expert agents allow issuers to negotiate more attractive pricing when they agree to investor-friendly terms. We finally derive higher post-offering stock returns when the issuer has an expert agent or agrees to more investor-friendly terms. Overall, these results suggest that the involvement of expert placement agents is beneficial to PIPE issuers.

Keywords: Private Investment in Public Equity, Financial Intermediary, Reputation, Hedge Funds