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Pipeline Definition

What Is a Pipeline?

In finance, the time period pipeline is used to explain progress towards a long-term objective that entails a sequence of discrete phases. 

For instance, private equity (PE) companies will use the time period “acquisition pipeline” to consult with a sequence of corporations they’ve flagged as potential acquisition targets. This pipeline would come with a number of phases, akin to trade analysis, lead era, negotiations, due diligence, and shutting.

One other use for the time period pipeline, though much less widespread, is to consult with corporations whose major goal is to be a conduit, or “pipeline”, for attaining sure tax advantages.

Key Takeaways

  • In finance, the time period pipeline is used to explain progress towards a long-term objective that entails a sequence of discrete phases. 
  • Completely different organizations will undertake their very own variations on the time period, akin to “gross sales pipeline”, “analysis and improvement pipeline”, and “acquisition pipeline”.
  • The time period can be used to consult with corporations which were structured to keep away from double taxation.

How Pipelines Work

The pipeline metaphor is usually used to explain progress via a sequence of phases culminating in a long-term objective. In lots of instances, the phrase is used to explain an ongoing course of. For example, within the instance above of a personal fairness agency’s acquisition pipeline, the pipeline itself could by no means finish as a result of new offers will all the time be coming into the pipeline as previous ones are accomplished.

Pipeline additionally refers to corporations which are looking for tax benefits, referred to as “pipeline corporations.” In response to the pipeline theory, corporations that go on all their returns to their shareholders shouldn’t be taxed like common corporations. As a substitute, the buyers of that firm needs to be taxed as people, with the distributions from their funding holdings included as a part of their earnings.

Firms that adhere to this commonplace are sometimes exempted from corporate income taxes primarily based on the premise that they’re successfully an funding pipeline that passes their earnings instantly via to buyers.

Proponents of this enterprise construction argue that taxing pipeline corporations primarily based on their corporate-level earnings would result in double taxation since those self same earnings would ultimately be taxed once more as soon as they’re acquired as earnings by their buyers. Examples of corporations that always obtain this tax therapy embody mutual funds, limited partnerships (LPs), and limited liability companies (LLCs).

Instance of a Pipeline

Funding bankers may consult with a pipeline of offers, together with varied phases from securing purchasers, performing underwriting and due diligence, attaining approval for regulators from the Securities and Exchange Commission (SEC), and advertising and marketing the shopper for an initial public offering (IPO).

Equally, banks may consult with their pipeline for processing new loans. Within the case of mortgages, this pipeline may embody advertising and marketing initiatives akin to statement stuffers for producing new prospects, performing credit checks on mortgage candidates, and processing the paperwork required to finalize the mortgage.

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