Lesser-Known Investments Burgeoned in Troubled '03

Article excerpt

Institutional investors searching for alternatives to the troubled mutual fund market last year boosted assets in products like Pipes and publicly registered direct participation programs.

The asset total in Pipes, or private investments in public equity, reached $19 billion last year, up about 12% from the year before, according to PIPEs Report, a newsletter. These privately negotiated deals are used by companies to generate capital, and more banks, including Goldman Sachs, UBS, and Merrill Lynch, are offering them to large investors as alternative investment products.

"Every major bank is looking at Pipes," said Steven Dresner, publisher of PIPEs Report.

Bruce Jones, an analyst in Chicago, said alternative investment vehicles like Pipes are gaining assets because "investors want an alternative to the alternatives." Hedge funds, the prototype alternative investment product, came under pressure last year as their average gains were modest and investigations nurtured skepticism about them.

Assets in direct participation programs were expected to total about $7.5 billion by the end of 2003 -- an increase of 76% since the end of 2002, when assets had reached $4.2 billion, according to Robert A. Stanger & Co., a Shrewsbury, N.J., research company.

Direct participation programs are investment products that include publicly registered, untraded limited partnerships, real estate investment trusts, and limited liability companies that invest in such assets as real estate, mortgage loans, oil and gas, and equipment leasing.

PIPEs Report said that the more than 1,500 Pipe deals in 2003 added $2 billion to the $17 billion in the product at the end of 2002. Mr. Dresner said he expects $21 billion of Pipe assets by this year's end.

"The business of Pipes is appealing to investors," Mr. Dresner said. "There is a built-in hedge so that investors get something that is better than stock." A Pipe combines elements of both public and private equity investment products. It is sold privately to a limited group of investors when companies want to raise additional capital without a secondary public offering.

The select group of investors buy, at a discount, a security, the Pipe, which is similar to preferred stock, along with a warrant that lets them convert into common stock at a predetermined price. In exchange, the investor must hold onto the Pipe for 60 to 90 days before selling.

Mr. Dresner said the collapse of the IPO market boosted the popularity of Pipes. …