Private equity exploits the PIPE-line

One Equity Partners, the private equity investment arm of JPMorgan Chase, and New York-based firm Clayton Dubilier & Rice have become the latest two private equity firms to find opportunity among publicly listed companies.

One Equity will buy $75 million of newly issued shares in ArthroCare, a listed medical device company. The proceeds will be used among other things to pay down debt, Arthrocare’s acting president and chief executive officer, David Fitzgerald, said in a statement.

CD&R, meanwhile, has made a $250 million PIPE – a private investment in public equities – in NCI Building Systems, a NYSE-listed business that supplies components to the building industry.

The investment from CD&R’s eighth fund is “part of a comprehensive solution to address NCI’s significant near term debt repayment obligations, reduce the debt by $323 million and position the company for future growth”, the firm said in a statement.

“We are convinced the CD&R Fund’s investment, while unfortunately very dilutive, is in the best interests of our shareholders,” said Norman Chambers, president and chief executive officer of NCI. He added that as well as reducing the firm’s financial risk in the short term, the investment would bring operational performance improvements as the economic environment improves.

CD&R’s deal follows a $350 million investment in June by London-based private equity firm BC Partners in another NYSE-listed business: Office Depot. In what was its first US deal, BC Partners acquired an effective stake of around 20 percent in the office supplies company.

Increased interest from private equity firms in publicly-traded companies is symptomatic of an environment in which scarcity of credit has made leveraged buyouts of large businesses difficult to execute.

While PIPE deals provide one way of putting unleveraged capital to work, they are only one of a number of alternative structures for buyout firms to make unleveraged investments. Jamie Rubin, a senior partner at BC Partners in New York who now sits on the Office Depot board, is not expecting a rash of PIPEs from his firm. “I don’t think PIPEs will provide a regular source of investment, because it is not control and that is definitely a departure for us,” he told sister publication Private Equity International, “We are going to be awfully discriminating about how many of these we do, but you’ll probably see other creatively structured control investments.”

These and other PIPEs, such as the $115 million investment by Los Angeles-based private equity firm Yucaipa Companies in supermarket chain Great Atlantic & Pacific Tea and TPG’s $180 million investment in roofing business Armstrong World Industries – both earlier this month – are indicative of an increased willingness by private equity firms to put money to work in the public arena.