Hedge Funds Pitch PIPE Dreams

Date: Tuesday, February 24, 2009
Author: James Armstrong, Hedge Fund Correspondent, Marketsmediaonline.com

Hedge funds providing Private Investments in Public Equity can help companies, provided the funds are able to find the cash, the chief investment officer of hedge fund firm West Coast Asset Management told Markets Media in an interview.

"It's a tough time for people to raise money right now," says Atticus Lowe, CIO for West Coast Asset Management. "But if you're an investor," he adds, "it's the best environment probably there's ever been."

Hedge funds investing in PIPEs are frequently called Reg D funds, after the Securities and Exchange Commission's Regulation D, which allows them to operate without interference. Reg D funds lost about 7.38 percent last year, according to data from industry tracker HedgeFund.net. They well outperformed hedge funds in general, which lost more than twice that.

With the current credit crisis cutting off the tap, many companies are turning to hedge funds to provide them with a new set of PIPEs. Unfortunately, the flow into those PIPEs is currently rather low.

Still, outperformance rarely attracts investors when a fund strategy still has a loss.

Lowe says most PIPE deals tend to be structured differently now. They often use secured debt with warrants and the option to convert into equity rather than a traditional straight stock issuance. The funds feel safer with these arrangements, because they allow investors to avoid the tempestuous equity markets, and companies prefer them because they do not require the dilution of their stock, which is often trading at low valuations anyway.

"At the right price, you can still get equity if you want," says Lowe. "It's just that most of the funds don't want it."