It wasn’t so long ago that special purpose acquisition companies (SPACs) were garnering headlines as a faster, easier, and less costly alternative to traditional initial public offerings (IPOs). But that exuberance has tempered a bit.
“SPAC transactions have adopted elements of traditional private equity structures such that management and sponsor returns are increasingly linked to achieving measurable results both now and, in the future.”
The number of SPACs in the market has declined and valuations have come down, according to Albert McLelland, Independent Director and Audit Committee Chairman at Breeze Holdings Acquisition Corp. and Managing Director at AmPac Capital Group. “There has been significant and increasing pressure on the market as a result of poor returns, high redemption rates, and an increased level of regulatory scrutiny. It has put a damper on the market. But on the other hand, the IPO market has declined more than the SPAC market has, so it’s not just a SPAC story in isolation.”
Statistics bear that out. Over the last year the value of IPOs decreased by about 51% while SPACs have decreased by 49% according to SPAC Research and Renaissance Capital. In October, there were two IPOs and three SPAC mergers, with about $370,000,000 raised.
“Looking back 18 months, if you’d put up 3% of the capital, you’d get 20% of the equity. Those numbers have changed,” says Sean Denham, Grant Thornton’s National SPAC leader, and National Audit Growth leader. “And 18 months ago, a lot of attempts were made to de-SPAC with companies that maybe weren't as mature as they needed to be structurally, with robust internal controls in place.”
A snapshot of the current SPAC environment
You can recognize today’s more rational reality by:
- The balance between investors and sponsors, with a view to the longer term. “SPAC transactions have adopted elements of traditional private equity structures such that management and sponsor returns are increasingly linked to achieving measurable results both now and, in the future,” says McLelland. “Shares will be held for longer periods.” Denham suggests that there’s more willingness among sponsors to work on the economics of the transaction. “Longer lock-up periods and longer commitments from sponsor teams send investors a message about their faith in the business,” he said.
- The trend back to third-party valuations and fairness opinions. “When you have somebody else looking at your evaluations, and testing whether your assumptions are appropriate and reasonable, you receive very valuable feedback and, hopefully, confirmation of the process you have undertaken,” says McLelland.
- Using debt. Once a merger is completed, debt is coming into play more than before. Anticipated growth will still be important, but the receipt of debt will be based more on actual performance.
- New regulations to protect investors. The SEC has come out to try to put better guardrails in place,” says Denham. “Hockey stick forecasts with buyer-beware legal disclaimers is something we are not seeing in S-4’s today.” According to a statement issued in March by SEC Chair Gary Gensler, the SEC is attempting to “strengthen disclosure, marketing standards and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional IPOs.”
Boards should expect the evolving future of SPACs to be characterized by:
- Activity in overseas markets. “SPACs are already looking to the European market. We’ll see targets coming out of the UK, Germany, and France,” Denham said. There may be growth in Hong Kong and Singapore as well.
- Evaluating SPAC board members for their operational and governance expertise. “SPACs have better performance when their boards include members who have actually run operations and run them on scale. And, prior public company board experience is invaluable,” McLelland said. “Look for people who have run large divisions and have operational expertise, who know what SOX is, and know how to put systems and processes in place to meet the rigors of being a public company. A board member with celebrity status is really only valuable to the extent that they have a network consisting of those with expertise that can be leveraged.”
- Strong relationships with external partners. Board members can rely on professionals who have up-to-date understanding of the market, the industry and the regulatory environment. Preparedness is going to be part of the value that comes from the sponsor team.
- Unique opportunities as SPACs run out of time. Many SPACs are going to be shutting down or running out of time starting in 2023. This may create opportunities for well positioned teams to acquire sponsors at a significant discount.
While the speed and volume in the SPAC market is unlikely to match the pace of 18 months ago, SPACs still have their place in the market when used in proper context to meet the proper objectives. So SPACS are still a viable option for accessing capital. They may have slowed down but they won’t fade away.
Albert McLelland is Independent Director and Audit Committee Chairman at Breeze Holdings Acquisition Corp. and Managing Director at AmPac Capital Group.
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