Canada: The Ongoing Evolution Of Canada's PIPE Market
Capital Markets and Mergers & Acquisitions Bulletin

Overview

Now that Fasken's Annual PIPE (Private Investment in Public Equity) Deal Point Study is in its fourth year, what have we learned?

Each of our annual deal point studies gives an overview of Canadian PIPE activity in that year and allows for comparison with previous years.

The benefit of producing a Canadian PIPE deal point study each year for multiple consecutive years is the ability to track broader trends and market developments over longer periods of time.

In other words, it provides insight into the continuing evolution and greater sophistication of Canada's PIPE market for the benefit of both investors and issuers.

We've therefore prepared a synthesis of that accumulating insight, as well as several practical takeaways.

What is a PIPE?

A PIPE (private investment in public equity) transaction is the sale of securities of a public company through a private issuance rather than through a public offering.

What distinguishes a PIPE from a typical private placement is (i) a single investor as purchaser, (ii) the meaningful percentage of the issuer's securities acquired by the investor, and (iii) the negotiated and often bespoke terms attached to the acquired securities.

Advantages of a PIPE for the issuer include a relatively faster and more cost effective means of raising capital. Another is the flexibility to structure the issuance in a manner that suits the issuer's objectives while safeguarding its interests (e.g., the inclusion of an investor standstill, transfer restrictions and/or longer hold periods).

Advantages of a PIPE for the investor include the acquisition of a substantial block of the issuer's securities at a reduced cost, i.e., as PIPEs are typically priced at a discount to market pricing. Other investor advantages include specifically negotiated shareholder rights not commonly available in a public offering, including preferential rights and governance rights.

Four Years of PIPE Studies: What Have We Learned?

Stepping back from the individual insights of our 4th Annual PIPE Deal Point Study to synthesize the aggregate intelligence of our four studies taken together, numerous notable observations emerge.

• We've confirmed that PIPEs can be of interest to even Canada's larger public issuers. The average market capitalization of the targets in our 2022 and 2020 samples was $1.75 billion and $1.82 billion, respectively. By contrast, our 2021 and 2019 samples had average target market capitalizations of $519 million and $520 million, respectively. This wide variance is explained by the presence of one or two much larger issuers in each of 2022 and 2020.
• We're gaining appreciation of which deal points can be more volatile over time relative to other deal points. One example is overall PIPE volumes in a given year. In 2019, 19 PIPEs met our criteria.¹ In 2020, volume decreased to 15 and in 2021 volume decreased further to 11. However, in 2022, volume rebounded strongly to 18 transactions. Another example is applicable industry, e.g., as illustrated by the strong rebound in the materials sector from 18% of Canadian PIPEs in 2021 to 50% in 2022. Such swings likely reflect larger macroeconomic trends, such as the growing realization over 2022 that mining and increased production of certain metals will be essential to the green energy transition.
• Similarly, we're gaining appreciation of which deal points may be more stable over time. Average transaction size is an example, the overall average across the four years being $99.36 million with the lowest figure being $85.90 million (in 2019) and the highest being $112.75 million (in 2021). Interestingly, also relatively consistent has been the ratio between "strategic" investors and "financial" investors, in each of 2020, 2021 and 2022 this having been a roughly 1/3rd "strategic" and 2/3rds "financial" split.
• Other deal points are exhibiting distinct trends. First, investors in Canadian PIPEs are growing increasingly international, the percentage of investors being Canadian declining from a high of 58% in 2019 to a low of 33% in 2022 (and losing ground to U.S., European and other foreign investors). Second, the TSX's share of PIPE transactions decreased from a high of 79% in 2019 to lows of 36% and 39% in 2021 and 2022, respectively, and with the greatest beneficiary of this loss of TSX market share being the TSX Venture Exchange (growing from a 16% share in 2019 to a 44% share in 2022). Third, common equity is increasingly the most popular form of security acquired, growing from 42% of deals in 2019 to 78% of deals in 2022. By comparison, while 42% of Canadian PIPEs in 2019 featured convertible debt, in 2022 this figure was 22%.
• Certain deal points exhibit evolution and increasingly creative structuring. A good example here is investor dilution protection and a trend in 2022 toward using options rather than pre-emptive purchase rights to defend against this risk. Specifically, our review noted an increasingly common tactic of incorporating adjustments made to the number of shares to be issued pursuant to warrants acquired via the PIPE transaction or adjustments made to the price of those securities to account for subsequent common share issuances. We interpret this as indicative of greater importance being placed on antidilution protection given economic volatility and increasing interest rates.
• Shifts in investor preference and/or strategy can also be detected. On the one hand, we've seen a decrease in the popularity of investor board nomination rights. On the other hand, we've seen an increase in the popularity of investor voting rights on specified key issues such as fundamental transactions and the issuance of additional securities. This indicates a decreasing appetite amongst investors to be actively involved in the issuer's operations accompanied by a corresponding increase in investor focus on securing influence regarding decision-points of material concern. It also evidences how related negotiation points can move in tandem (though, in this case, in opposite directions).
• Lastly, our individual annual PIPE studies provide high-level snapshots of PIPE market practice in different economic climates. We expect 2019 will serve as a useful example of a more "normal" year historically. By contrast, 2021 offers an example of PIPEs in a growth or bullish market. On the other hand, 2022 is an example of an increasingly cautious or bearish market. These snapshots also offer helpful insight regarding the oscillation between target and investor bargaining power, such as when and how investors may be better placed to procure enhanced protection and/or control.

Practical Takeaways

Overall, Canadian PIPE activity over the past four years evidences the continued evolution and increasing sophistication of Canada's PIPE market.

Moreover, mining the data and deal terms of each significant PIPE transaction over this period provides numerous practical benefits and advantages.

One is that the accumulation of this intelligence is an asset that can assist in informing negotiation strategy in a particular PIPE transaction, for example as to which deal points may be open to greater negotiation as compared to which deal points may be more difficult to win.

Another is that the accumulation of this intelligence can facilitate optimal client outcomes – whether for investor or issuer – including by leveraging a closer understanding of how contentious issues can be tackled and resolved, whether by creative structuring, alternative strategies, or otherwise.

Footnote

1. The PIPE deals we reviewed were sourced from Capital IQ, using the following criteria: transaction type (PIPE), target type (public company), geographic location of the target (Canada), transaction value (greater than $10 million), definitive agreements signed and transaction closing date between January 1 and December 31 of the applicable year. A PIPE deal did not qualify for our study if only material change reports, early warning reports and/or press releases were publicly available, without any other definitive agreement also being publicly available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.