Five Questions With Robert Kyle –

Robert Kyle, Executive Vice President, Sagient Research

Sagient Research is a San Diego-based publisher of independent research for the mutual fund, hedge fund and investment banking markets. In 1999, Sagient launched PlacementTracker, a group dedicated to coverage of the PIPE market.

1. What is the overall state of the PIPE market these days?

The PIPE market is really strong. Last year was a record year for the number of transactions and it was the second highest year for dollar volume. And so far this year, the dollar volume is actually higher than it was for this timeframe last year, even though the number of deals [completed] is down a little bit. Just looking at 2005, there’s been 352 transactions done in the first quarter, for a total amount of around $6 billion. Last year, there were 414 deals done in the first quarter for around $5 billion. So the average deal size has gone up to an average of $17 million from about $12 million, and that’s probably caused by people getting more comfortable with the PIPE structure.

2. What are you seeing in regards to the quantity of private equity players participating in PIPE deals these days?

It’s picked up certainly in the last year or two, and this year it’s pretty good too. There have been about 10 investments done by private equity firms this year for around $800 million. Last year there were 27 private equity investments totaling about $1.5 billion.

3. Is this the best PIPE market we have ever seen?

We’ve already exceeded the dollar volume from two years ago on the PE side of the market. In 2003, there were 38 [buyout-backed PIPE] deals completed, but they were only worth about $603 million. When the market is really beaten up, that’s when you start to see more PE groups-and even venture capital-invest in PIPEs. Some of these companies are too illiquid to attract a mutual fund or a hedge fund, so private equity becomes the best available option.

Obviously the private equity firm has a metric that makes the investment make sense-some real value that’s not being respected by the public markets.

4. What industries are hot right now?

The big ones so far this year are communications and energy. There’s actually been $2.3 billion worth of communications [PIPE] deals done in the fist quarter out of the entire $6 billion. I don’t know what the reason for that is. I don’t think that telecom stocks are doing quite well. Usually you see the PIPE markets reflect what the bull markets are in the overall market. Last year healthcare was the biggest sector and there was only $965 million worth of telecom [PIPE deals] for all of 2004.

5. With Guillaume Pollet, a former managing Director of SG Cowen, recently being charged with insider trading and fraud by the SEC, do you think there will be any ripple affects on the PIPE market?

That issue had been out there for quite awhile, but the criminal charges are obviously new. It’s really strengthened the Chinese wall in PIPE transactions where you have trading operations and investment operations under the same roof. There’s a lot more precaution taken to make sure everybody knows that when a PIPE is getting done, the information is material and non-public so you’d better be sure not to trade on it. That’s kind of filtered its way through the whole market and every PIPE market participant is really cognizant of that issue now.