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Spectacular SPACs – The Unicorns Are Coming

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COVID-19 Insights Advisory October 28, 2020
COVID-19 Insights Advisory October 28, 2020
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They’ve been called a flash in the pan by market pundits, critiqued for questionable returns, but the so-called Special Purpose Acquisition Companies (SPACs) that are sweeping US capital markets look like they are here to stay, and are even starting to draw the attention of America’s fabled unicorn companies.

SPACs have been around for decades, but until recently they had been viewed by the mainstream as mostly fringe investment vehicles with a mixed record for success. That perception has shifted significantly, with blue chip private equity firms and well-known public company operators lending credibility to the product and driving successful outcomes for target companies and outsized returns for market participants.

In the spring of 2020, when the IPO market ground to a halt in the wake of the COVID-19, the first deals to reopen the pandemic window were SPACs, with investors drawn to the downside protection the vehicle affords.

In normal markets, SPACs have attracted investors in search of a minimum yield with downside protection on a pre-deal basis. On the downside, the SPAC vehicle gives shareholders the opportunity to redeem their shares for principal plus interest if they view the eventual acquisition as unattractive. In periods of significant market dislocation and a low-interest rate environment where you have few alternatives for yield, it becomes especially attractive.

As a result, we’ve seen SPAC IPO volume balloon this year to roughly 44% of all U.S. IPO volume, well above historical averages in the mid-teens, with total proceeds already equal to the last five years combined and still three months remaining.

Table: SPAC IPO Volume

Source: Dealogic as of 9/23/20

Myth Busting

A prevailing criticism of the SPAC vehicle, and one which has made it a largely niche product since its inception in the 1990s, has been its poor aftermarket returns, and that is certainly fair when viewed on a historical basis. For example, from 2015 to 2019, the average SPAC acquisition traded down over 10% in the first year following its public listing. However, that trend has changed dramatically in 2020, with the average deal announcement trading up over 20% vs its SPAC IPO price of $10. While many a market pundit still sees the SPAC breakout as a flash in the pan, the evidence suggests they are here to stay.

In recent years SPACs have undergone a paradigm shift as sponsor profile shifted from lesser known teams without name brands to higher quality capital providers and management teams, allowing them to offer a more competitive and less dilutive vehicle to potential target companies. Put simply, the teams raising SPAC IPOs today are more accomplished, are achieving more attractive terms and are targeting higher quality companies of scale that are better suited for public markets.

Investor Support

Perhaps the biggest reason for recent SPAC acquisition performance has been a new wave of support from institutional investors in the form of pre-committed PIPE (Private Investment in Public Equity) financings at the time of acquisition. This concurrent financing accomplishes two key objectives: it provides incremental capital to the target company beyond the amount previously raised in the SPAC IPO and it also serves as validating capital as high quality institutional investors endorse the merits of the acquisition.

PIPE financings are not necessarily new to the SPAC product, but they used to be a much smaller part of the overall SPAC ecosystem than they are today. So far this year, roughly 70% of acquisition announcements have been partially de-risked by pre-committed PIPE financing at the time of acquisition announcement.

This concept of de-risking transactions through concurrent PIPE financings has been one of the driving forces that has led higher quality companies to consider SPACs as a viable IPO alternative, especially those that are considering raising a later stage private round ahead of a traditional IPO. The SPAC transaction now represents a way to accomplish both a private capital raise and a public listing in one transaction, often allowing a company to raise more total proceeds than a standalone IPO. As a result, the decades-old narrative of “SPACs are for lower quality companies that are unable to go public via a traditional IPO” is simply no longer accurate.

At BMO Capital Markets, the paradigm shift has manifested itself in a growing number of private company clients that need to be educated on these new developments in the SPAC market as they consider how to best access the public markets. Similarly, BMO is also in constant dialogue with ex-public company executives and private equity firms that are looking to raise SPAC IPOs in the near term with the goal of partnering with high quality companies to help unlock the next phase of their growth.

Companies of Today and Tomorrow

From potato chip brands to space travel companies, the benefits of the SPAC product have been applied across every sector and financial profile.

Witness, for example the $1.6 billion acquisition of Utz Quality foods, the century-old family-owned maker of the iconic Utz-brand potato chips, by Collier Creek Holdings – a SPAC focused on acquiring and operating companies in the consumer goods category. But by the same token, where the starting goal is growth rather than profitability, the vehicle is especially well-suited to emerging sectors, the companies of tomorrow that are still years away from being profitable and are not yet sellable as traditional IPOs.

In sectors from space travel to electric vehicles to online gambling where there are no clear valuation constructs in the public market, SPACs have become the preferred method of going public because of the ability to disclose forward looking projections. As a result, private companies in emerging growth sectors are drawn to the SPAC vehicle because it allows them to intimately walk investors through strategic growth plans and how new capital will be allocated, providing them with more transparency than a traditional IPO process which often leads to incremental valuation credit.

The Unicorns Are Coming

With a host of ever-larger SPAC IPOs – some well over $1 billion – looking for deals, sponsors are already drawing the attention of many of America’s fabled unicorns, companies with billion-dollar valuations and high growth potential.

A case in point was the successful de-SPACing of Virgin Galactic, a company focused on private space travel which had yet to book any substantial revenue, that was acquired for $2.0bn in late 2019 with valuation based on expected revenue in 2023.

Other similar examples of unicorns that have recently announced plans to go public via SPAC acquisitions include digital real estate platform Opendoor for $6.3bn, 3D printing company Desktop Metal for $2.5bn, and mobile gaming platform Skillz for $3.5bn.

If actions speak louder than words, we need not look much further than the $4 billion SPAC raised in July by Bill Ackman, the founder and CEO of hedge fund management company Pershing Square Capital Management. SPAC sponsors of this size, as well as a host of others in the $300-$500 million range, are undoubtedly having direct dialogue with other unicorns looking to achieve similar outcomes.

Read more
Eric Benedict Managing Director, Co-Head, Global Equity Capital Markets


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