Are PIPEs The Next Frontier For VCs?

By Jonathan Matsey

According to research firm DealFlow Media, venture capital and private equity investors put nearly $1.5 billion into public companies in the first quarter, three times the amount invested by hedge funds, the traditional capital suppliers for PIPEs, or private investment in public equities.

As we’ve mentioned before, plummeting stock prices are prompting many venture capital firms, especially those that invest in health care, to snap up what they see as bargain-priced shares of publicly traded companies.

In its report announcing the first-quarter numbers, DealFlow Media says that venture capital firms’ increased involvement “suggests that we may be on the cusp of an era when the promise of PIPEs as ‘public venture capital’ will become a reality.”

Not so fast, says one venture capitalist. “When the history of this era is written, people will say how few PIPEs were done,” Dennis Purcell, senior managing partner at Aisling Capital, said onstage at a health care industry conference earlier this week. “What’s happening in the VC community is that there is not a whole lot in the public markets to invest in, but six months ago, I thought we would have one-half of our fund in the public market.”

On Tuesday, the 100-plus attendees at that conference, Windhover Pharmaceutical Strategic Outlook in New York, were asked if PIPEs were the best way for venture capitalists to boost returns. Only 13% of the audience voted yes.

But investors don’t appear to be swearing off public-market deals any time soon. Index Ventures, traditionally a specialist in early-stage deals, raised a EUR400 million growth fund last year that will allocate a fair share of capital to PIPEs. Another veteran firm, Venrock, raised a $194 million fund in March that gives the firm extra capacity to make public-market or mezzanine investments.

These investors may not be putting any money into any newly public venture-backed companies anytime soon, though, considering Aug. 8 was the last time a venture-backed company held an IPO. Back at the health care conference, venture capitalists were glum about the prospects of any such companies making the jump to listed status anytime soon. Specifically regarding biotech IPOs, Michael Ross, a managing partner at SV Life Sciences, estimated that we won’t see such a public offering until 2011. Francesco De Rubertis, a partner at Index Ventures, guessed within three or four years, while Aisling’s Purcell was the most optimistic of the bunch, believing a biotech IPO would occur by late 2010.