Key Takeaways from Capital Markets Series on SPACs: Unlocking a “Blank Check”

Fenwick & West LLP

Fenwick & West LLP

In a recent installment of the Capital Markets Series, I joined Jon Campagna, CFO of Virgin Galactic, and other experienced advisors and professionals from KPMG and BofA to discuss how private companies can unlock capital-raising opportunities offered by “blank check” investors, also known as SPACs.

Here are some major takeaways.

SPACs by the Numbers

  • As of September 2020, there had been 58 initial public offerings of SPACs in the U.S. in the third quarter alone, raising just over $25 billion. This year's record haul is more than half of all the previous years combined, dating all the way back to 1995. With more private companies willing to sell to SPACs in 2020, the underlying deal fundamentals are improving. 
  • The average deal size in SPACs M&A is also on the rise. This year's average deal size of more than $991 million edges out 2017’s average deal size of $981 million and 2018's $954 million.
  • In 2020, 95 stock listings have generated $37 billion so far, compared to 59 stock listings that raised $13.5 billion in 2019, and 46 listings that produced $11 billion in 2018. 
  • There are nearly $54 billion in total announced deals that have not yet closed. 
  • There’s an estimated 150 newly formed SPACs that are searching for targets.

Target Profile

The scope of SPAC targets in 2020 has expanded, with M&A deals being initiated and completed across almost all sectors. As of the end of September, there were seven technology transactions totaling almost $8 billion and four totaling $8 billion in business services, which other than one deal last year, had not seen a SPAC acquisition since 2013. In addition, there have been three industrial deals, three consumer acquisitions, two financial institution transactions, a media deal, a healthcare deal and an energy deal.

  • Private equity-owned companies. The other area seeing a significant number of transactions involves companies owned by private equity (PE) firms looking to pay down a significant amount of debt or achieve significant monetization. Even though traditional IPOs can yield higher valuations, the far more efficient liquidity offered by SPAC transactions and the large amount of recent proceeds have made it an attractive financing alternative for PE firms as an exit strategy.
  • Halo effect. Little-known companies are also getting into the action, mostly benefiting from the “halo effect” of SPAC sponsors. Having validation of SPAC sponsors who have a sterling track record of running successful companies can help promote a private company that would have otherwise been overlooked by institutional investors.

Key Considerations

  • Investor education. Consistent and ongoing education with all shareholders, including PIPE investors, is critical. Consider establishing a dedicated internal investor relations person to connect with your investors and analysts to help build coverage. One of the major differences between an IPO and a SPAC transaction is the sponsor’s ability to communicate directly with investors. The liability standards are slightly different and there's more flexibility with a SPAC, but you will still be held accountable for any financial projections in the same ways that you would be vis-à-vis providing investor guidance during an IPO process.
  • PIPE matters. Having a strong PIPE backing could spell the difference between success and failure of the transaction. Lining up strong PIPE investors can mitigate risks and calm general public market sentiments when it comes to excess redemption issues.
  • Public company readiness. Keep in mind that once the transaction is complete, your company is expected to run like a public company. The readiness efforts that you would engage in in connection with an IPO transaction are contemporaneous with the ones that you're going to deal with in the context of a SPAC transaction. Ensuring that you have control and making sure that you have predictability in the business—all of these various items need to be taken care of ahead of time since the SPAC process can move very quickly.

The Capital Markets Series was hosted by Fenwick, KPMG and BofA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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