A theme over the last several years in the private equity industry is that sponsors, for myriad reasons, have increasingly left their comfort zone and are looking to deploy capital not only in new asset classes but also in new ways. Many sponsors that have traditionally focused on leveraged buy-outs have explored new investment methods, including growth equity, special situations and debt investing. An interesting part of this trend is the increasing use by private equity sponsors of special purpose acquisition companies, or SPACs.
Given the recent surge in the use of SPACs (over $3 billion raised in each of the last two years), most readers will by now be familiar with the technology. A special purpose vehicle raises funds from the public, which funds sit in a trust for a prescribed period of time (two years is the norm), during which period of time the SPAC must find a suitable target. Sometimes SPACs will have specific acquisition mandates (e.g., in terms of industry sector), although recently these mandates have been much broader. In the last couple of years, high profile private equity sponsors such as TPG, The Gores Group, WL Ross, Avista and others have raised SPACs (and in many cases closed deals through their SPACs).
SPACs are attractive for private equity sponsors for a number of reasons.
- The most obvious attribute of a SPAC is that it gives sponsors access to public markets, which can be particularly valuable depending upon the life cycles of funds that a sponsor is managing at the time it is considering raising a SPAC.
- It may give sponsors a means to invest in an industry or type of investment that it would otherwise be prohibited from or restricted with respect to its relevant fund documents. Again, this can be particularly beneficial depending upon the lifecycle of a sponsor’s other funds.
- Notwithstanding that the capital in a SPAC transaction comes (largely) from the public and does not provide sponsors with traditional fees and carry, the SPAC structure allows sponsors to achieve private equity type returns through the issuance of sponsor shares and warrants (which upside may be shared disproportionately with investment professionals employed by the sponsor).
- SPACs also can be attractive to targets (e.g., those looking to IPO) and therefore, private equity sponsors benefit by being potentially more attractive as buyers. In the past – given the relative novelty of SPACs – some targets may have been skeptical when approached by a SPAC; many now see that not only are SPACs credible buyers, there are in fact advantages to teaming up with a SPAC.
- As a general matter, the innate flexibility of SPACs is a very useful tool for sponsors that are constantly juggling multiple types of investments across multiple industries.
And there have been many interesting trends that have accompanied the increased use of SPACs by private equity sponsors.
- SPACs are looking at bigger acquisitions. This has in turn led SPACs (particularly where private equity sponsors are involved) to be more creative in raising capital (e.g., through private placements, which in some cases may be committed upon the formation of the SPAC).
- It’s easier to get the SPAC stockholder vote than it used to be. While the existential risk for SPAC deals remains, the possibility that there are a material amount of redemptions and the SPAC has insufficient cash to fund the transaction, another risk of SPAC deals – the failure to get the SPAC stockholders to approve the deal – has been largely ameliorated. This has been done principally by allowing SPAC stockholders to approve a deal while also redeeming their shares, which they were historically prohibited from doing.
- Private equity sponsors are deploying their economics in a creative way to get deals done. One trend in this regard is that sponsors in recent deals have effectively transferred or waived their promote to participants in private placements and in some cases to stakeholders in target companies. The public has also benefited in that sponsor warrants are now often exercisable for 1/3 of post-closing public company shares as opposed to a full share; thus reducing the risk of overhang in the market.
As SPACs become mainstream, more and more sponsors are taking a fresh look at this unique way to raise and deploy capital. In addition, several sponsors that have successfully deployed this strategy have raised additional SPACs. It will be interesting to see if this trend continues in 2017 – if and as it does we can be sure that private equity sponsors will continue to think outside the box and find creative ways to maximize the utility of SPACs.