PIPE

Most of the time, a Category III AIF buys listed shares the ordinary way: through the stock exchange, at the going market price. A PIPE transaction is different.

PIPE stands for Private Investment in Public Equity. The fund negotiates directly with a listed company and buys a block of shares outside the open market, often at a discount to the market price. In exchange for putting in a large sum at once, the fund may also get board representation and a seat at the table on how the company is run.

The workbook lists PIPE as one of the common ways Category III AIFs get exposure to listed stocks, alongside taking market-neutral or short positions and exploiting arbitrage. It notes that PIPE transactions are becoming more common, especially where the fund wants to invest a substantial amount in a single company and take an active role in board management.

A PIPE is a direct deal between the fund and the company, not a stock-exchange trade. That is what makes it "private" even though the company itself is publicly listed.

Deccan Growth Fund, a Category III AIF, wants exposure to a listed mid-cap manufacturer whose share price on the exchange is Rs 340. Buying a large block on the open market would push the price up as the fund keeps buying.

Instead, Deccan negotiates a PIPE deal directly with the company: it subscribes to 10 lakh freshly issued shares at Rs 300 each.

Investment = 10,00,000 x Rs 300 = Rs 30 crore

As part of the deal, Deccan's investment manager gets one seat on the company's board. The company gets Rs 30 crore of growth capital without a market sale depressing its share price; Deccan gets a below-market entry price and a say in how that capital is used.

Chapter 3, section 3.4 (Investments by Category III AIFs), lists PIPE transactions among the common investment mechanisms Category III AIFs use to gain exposure to listed stocks, alongside market-neutral positions, arbitrage and pre-IPO deals. Expect PIPE tested as a definition question — what the acronym stands for, and that it is a direct, negotiated deal rather than an exchange trade.

• "Public Equity" means the company is listed — the transaction itself is still private, negotiated directly with the company rather than executed on the exchange.
• A PIPE is not the same as buying pre-IPO shares. Pre-IPO investing happens before a company lists; a PIPE happens in a company that is already listed.
• Board representation is a common feature of a PIPE, not a guaranteed one — it depends on the size of the stake and what the fund negotiates.