SPAC: Special Purpose Acquisitions Company

What are SPACs

  • SPACs are public listing vehicles, first launched in the early 2000’s as alternatives to traditional IPOs
  • SPACs IPO as non-operating listcoswith cash in trust, then merge with operating companies, resulting in the operating companies being publicly listed
  • SPAC mergers combine the benefits of an IPO with the structural flexibility of M&A
  • SPACs provide investors with the security of cash held in trust plus equity upside
  • SPACs provide sponsors the access to outsized returns by combining their target pipeline with public equity valuations and investors
  • Typical SPAC investors include hedge funds, pension funds and insurance companies, notably:
    • AQR Funds
    • BlueMountainCapital Management
    • Davidson Kempner Capital Management
    • Fir Tree Partners
    • GLG Partners
    • HighbridgeCapital Management
    • Polar Asset Management
    • Soros Fund Management
    • Weiss Asset Management
    • Wellington Management
  • Typical SPAC teams include private equity management and corporate executives, notably:
    • Blackstone Group
    • RiverstoneHoldings
    • TPG Capital
    • WL Ross and Co.

Primary SPAC M&A Value Drivers

  • Private to Public Arbitrage 
    • Acquisition of Target Business effected at or near private equity valuation 
    • Pro forma combined company typically achieves significantly higher public equity valuation 
  • M&A Strategies 
    • Consideration flexibility
      • Earnouts: milestone based incentives
      • Cash from warrant exercise
      • Contractual strategic vend-in rights 
  • Strong Institutional Interest
    • Qualified institutional interest established at IPO 
    • Approximately 80% of IPO investment by institutions 
  • SPAC Management Premiums
    • Investing Premium
      • Top securities industry experience 
    • Acquisition Premium
      • Top global and regional insider with ability to purchase target companies with superior structures and at superior valuations 
    • Operational Premium
      • Top executives able to help target companies with management, sales, and strategic partners

Advantages to SPAC Sponsors/Management

  • Ability to Attract Capital
    • Unlimited SPAC IPO size
      • SPACs have demonstrated the ability to successfully raise capital commensurate with management’s prospective target range
      • Additional capital readily available as necessary to merge with outsized targets 
  • Complementary Investment Vehicle 
    • SPAC IPO may be seen as an additional structure to supplement management’s suite of investment activities
      • Put substantial amount of money to work in a transaction over which management exercises high degree of control
  • Leveraged Compensation
    • Approximately 20% of the pre-merger primary equity is distributed between management and initial sponsors as compensation for the risk and managing the SPAC