Wednesday, November 16, 2011

Inverted PIPESs

A PIPE is a private investment in a public entity.  It is a financing technique useful for bringing new equity capital into a public reporting company without increasing the number of shares floating around the stock market, at least not right away.  It's primary competitive advantage is that is allows some control over the potentially adverse impact of perceived dilution when new equity is brought into a company that is not immediately accretive to earnings, i.e. that will not produce incremental new profits right away.

I got to thinking about this, because I am aware of an Enterprise looking at putting together some mining interests in South America, with possible Investment out of China.  Doing a little background research on mining companies, lead me to the website of Barrick Gold, a company that promotes itself as the largest gold mining company in the world.  They are a US public reporting company so they are required to disclose considerable amounts of detail pertaining to their business, which is worldwide.

Searching through all this data hoping to get some insights into the mining business, generally, it struck me that very little data about their underlying businesses are actually reported to the public.  In truth, I see this company as more of a highly specialized investment management business, whose corporate activities really relate to its success at managing a portfolio of investments in Enterprises, some wholly owned, some apparently owned in partnership with others, that actually conduct mining operations.

They are a kind of inverted PIPE: a public investment in private entities.

I think many of our largest public reporting companies are properly described as "inverted PIPEs": more highly specialized investment funds, than businesses directly engaged in commercial enterprise.

Explains a lot.

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