During the last several years SPACs have gone mainstream with brand name private equity sponsors raising SPACs and brand name private equity sponsors selling portfolio companies to SPACs. Private equity sponsors who are considering a public markets exit for their portfolio companies may want to consider the pros and cons of taking their portfolio company public through a traditional IPO or a SPAC. The chart below summarizes the principal similarities and differences between effecting a public market exit through an IPO or a SPAC.
|Topic||Exit Through an IPO||Exit Through a SPAC|
|Suitability of company for public markets||Certain companies have attributes (growth prospects, industry type, leadership team) that increase the likelihood that they may IPO successfully||Able to take public companies that are not obvious IPO candidates|
|Valuation||Valuation depends upon market demand||Valuation is determined by negotiation between SPAC sponsor and sellers|
|Economics for sellers||No incremental economics||Ability to share in SPAC sponsor founder shares and warrants|
|Ability to rollover||Automatic “rollover” of shares not sold in the IPO by selling stockholders||Can negotiate with SPAC sponsor to rollover shares into SPAC vehicle|
|Expense of going public||Expensive process due to professional fees and underwriting discounts||Marginally less expensive as no underwriting discounts involved|
|Use of proceeds||Ability to raise equity capital to fund the business and repay debt||May be able to raise equity capital through a related PIPE transaction or use existing SPAC capital to repay debt or fund operations|
|Ability to monetize equity through going public||Able to sell secondary shares in IPO||Ability to receive cash consideration in the acquisition and to sell any secondary shares after the transaction|
|Process involved in going public||Requires extensive SEC level disclosure and SEC review||Requires extensive SEC level disclosure and SEC review|
|Creation of liquid trading market||Able to create a liquid trading market||Able to create a liquid trading market|
|Liquidity for existing holders||Creates public market for exit||Creates public market for exit|
|Ability to use equity to fund acquisition strategy||Able to use public equity for acquisitions||Able to use public equity for acquisitions|
|Execution risk||Ability to consummate IPO depends on market conditions||Ability to consummate sale to SPAC depends on non-exercise by SPAC stockholders of redemption rights and acceptance by public stockholders|
|Recourse for breach||Not applicable||Generally no recourse for breach|
As the chart above indicates, there can be significant advantages to structuring a public market exit for a portfolio company through a SPAC rather than a traditional IPO, including being able to customize the terms of the exit so that the selling sponsor can share in the founder shares and warrants received by the SPAC sponsor in connection with the formation of the SPAC and structuring the sale as an all cash deal or some combination of cash and stock. On the flip side, there is market risk in closing the SPAC transaction due to the redemption rights of the SPAC stockholders (although there is also market risk with an IPO obviously). The structure you choose will likely depend upon the nature of your portfolio company and your objectives.