Pipeline

What Is a Pipeline?

In finance, the term pipeline is used to describe progress toward a long-term goal that involves a series of discrete stages. 

For example, private equity (PE) firms will use the term “acquisition pipeline” to refer to a series of companies they have flagged as potential acquisition targets. This pipeline would include several stages, such as industry research, lead generation, negotiations, due diligence, and closing.

Another use for the term pipeline, although less common, is to refer to companies whose primary purpose is to be a conduit, or “pipeline”, for achieving certain tax advantages.

How Pipelines Work

The pipeline metaphor is often used to describe progress through a series of stages culminating in a long-term goal. In many cases, the phrase is used to describe an ongoing process. For instance, in the example above of a private equity firm’s acquisition pipeline, the pipeline itself may never end because new deals will always be entering the pipeline as old ones are completed.

Pipeline also refers to companies that are seeking tax advantages, called "pipeline companies." According to the pipeline theory, companies that pass on all their returns to their shareholders should not be taxed like regular companies. Instead, the investors of that company should be taxed as individuals, with the distributions from their investment holdings included as part of their income.

Companies that adhere to this standard are often exempted from corporate income taxes based on the premise that they are effectively an investment pipeline that passes their income directly through to investors.

Proponents of this business structure argue that taxing pipeline companies based on their corporate-level income would lead to double taxation since those same profits would eventually be taxed again once they are received as income by their investors. Examples of companies that often receive this tax treatment include mutual funds, limited partnerships (LPs), and limited liability companies (LLCs).

Example of a Pipeline

Investment bankers might refer to a pipeline of deals, including various stages from securing clients, performing underwriting and due diligence, achieving approval for regulators from the Securities and Exchange Commission (SEC), and marketing the client for an initial public offering (IPO).

Similarly, banks might refer to their pipeline for processing new loans. In the case of mortgages, this pipeline might include marketing initiatives such as statement stuffers for generating new customers, performing credit checks on loan applicants, and processing the paperwork required to finalize the loan.