Gores Group claims that the market for sellers who go public through PSPC has grown significantly.
Photo by Ringo Chiu.
Special Purpose Acquisition Companies, or SPACs, are in the midst of their greatest moment yet.
Driven in part by deals with local companies like the Gores Group and Harry Sloan’s SPAC Eagle series, a multitude of large companies and investors are adopting the approach.
According to Silicon Valley Bank, PSPCs accounted for 35% of initial public offerings in the United States through June 2020. Together, the vehicles have raised $ 19 billion in the first six months of this year, or more than the total raised over the six years from 2010 to 2016.
Among those deals were a series of local moves that made headlines, such as Draftkings Inc.’s $ 3.3 billion merger with Diamond Eagle Acquisition Corp. and the planned multibillion-dollar PSPC mergers for electric vehicle manufacturers Canoo Inc. and Fisker Inc.
The growth in popularity of PSPCs has only accelerated as the Covid-19 pandemic has continued, prompting some industry watchers to question whether this is the start of a new paradigm in public procurement – or a PSPC bubble waiting to burst.
Also known as blank check companies, SPACs are commercial entities that have no activity of their own. They are created to raise funds through initial public offerings. The managers then use the funded vehicle to acquire a target business that is seeking to go public in a reverse merger.
PSPCs have recently become known as a way to raise public funds faster than through a traditional IPO, especially for high growth capital,
intensive businesses. One of their main advantages is that they often have lower short-term uncertainty levels, as most funding is already locked in before the target company goes public.
However, blank check companies have not always had such a good reputation.
Ten years ago, they were often seen as a way for companies with unconvincing investment prospects to squeeze through the IPO process.
“In the beginning, SPACs had a bad reputation,” said Sloan, former managing director of MGM Holdings Inc. and founder of six Century City-based SPACs under the Eagle name, including Diamond Eagle Acquisition Corp.
“You never wanted too much publicity as a PSPC guy when we started this in 2011,” Sloan said.
Sloan said he and his partner, former CBS Entertainment Group CEO Jeff Sagansky, had to rely heavily on their own reputation and industry expertise to win over investors early on.
What we said was, ‘We’re media guys. We will bring you what we know, ”Sloan said. “If something was wrong with the management of the company, we could temporarily step in as media executives. “
“I don’t think people would have invested with us without our expertise,” he added.
Most of Sloan’s PSPC deals have targeted companies with at least one connection to the media and entertainment space. His latest play, a $ 3.5 billion merger between his Flying Eagle Acquisition Corp. SPAC and the mobile gaming platform Skillz Inc., is betting on esports as a future pillar of the entertainment industry.
In the past, many SPACs have followed a similar model of relying on the industry expertise of their sponsors to attract investors, although with less success than Sloan’s efforts.
Three years after Sloan created his first SPAC, another group of local negotiators sought to redefine this decades-old approach.
Mark Stone of Beverly Hills private equity firm Gores Group said he and company founder Alec Gores have started exploring PSPCs as a potential way to expand beyond traditional capital offerings. -investment.
“PSPC didn’t have a good reputation (at the time),” Stone said. “We decided that the vehicle was not faulty but that people had not performed appropriately for it. … We thought we could do it right.
Stone, who now heads Gores’ SPAC practice, said the relatively small size of most older SPAC investment pools meant vehicles could often only target lower quality companies.
“We said, ‘Let’s turn it around, look for companies over $ 2 billion (enterprise value) – what we call the middle market,” Stone said.
Rather than relying on personal industry knowledge, Stone’s strategy was to bring together large pools of capital that could attract companies with strong growth trajectories. His company would add additional investors through private equity investments, or PIPEs, both increasing total available capital and boosting investor confidence by adding top institutional players to deals.
Over the next five years, Stone led six PSPC increases for Gores under this model. Four of these blank check companies have completed mergers to date, with targets ranging from iconic snack maker Hostess Brands Inc. to autonomous vehicle sensor maker Luminar Technologies Inc.
The success of these deals has led Gores Group to focus more and more on PSPCs in recent years, although Stone said the company remains engaged in its traditional private equity business as well.
The participation of actors like Gores Group in the SPAC space has had effects beyond changes in the strategies of individual companies. As PSPC sponsors became increasingly known as established and reputable market players, blank check companies began to lose their long-standing dubious reputation.
“It has certainly helped improve the image of PSPCs,” said Paul Sachs, managing director of consulting firm Protiviti Inc.
Sachs said the combination of these companies’ strong reputations and the ability to raise larger capital was likely the key to the radical change surrounding SPAC.
“In a traditional SPAC, the sponsor will have a seat on the board,” Sachs said. “If a company is going to give up on this as part of going public, they have to make sure it’s someone they want to work with for the long term.”
This improvement in reputation laid the groundwork for what Sachs called the “perfect storm” for PSPCs to take off once the Covid-19 pandemic struck.
“Economic volatility and the sharp decline in prices have made IPOs and direct listings impractical options for many private companies,” Sachs said. “It has certainly drawn attention to SPACs as a way for private companies to access public procurement. “
From an investor perspective, many private equity firms, hedge funds and other asset managers were sitting on huge pools of capital at the start of this year. Sachs said that PSPCs have emerged as one of the most viable ways for these companies to invest their funds quickly and take advantage of the strength of the stock markets in recent months.
“PSPC has certainly benefited from the pandemic,” Sachs said. “This is partly why we have seen the growing number of SPACs coming in, as well as why some large institutional players are getting started.”
General public alternative?
Predictions on where the current the wave of market activity ultimately leads for the SPAC sector range from bullish to bearish.
“What happens until the end of the year, especially with all the uncertainties surrounding the macro environment, will determine the future of PSPCs,” said Robby Kumar, managing director of Silicon Valley Bank based in Santa Monica. “It goes back to the performance of this (PSPC) cohort, which is so different from the previous groups.”
Kumar’s bank is bullish on PSPCs and included in its Q3 State of the Markets report this prediction: “If PSPCs and direct listings continue to gain adoption, the traditional IPO route could eventually. become obsolete. “
Kumar said he believed such a dramatic change was unlikely, but added that PSPCs could become a popular alternative to IPOs if the current group of deals do well for businesses and investors.
Stone of Gores Group is somewhat less convinced that the current trajectory of the PSPC market is sustainable. “I think there is a risk that the PSPC market is oversaturated,” he said. “It won’t surprise me if there is a lot of carnage. “
Stone said he sees PSPCs as a solid alternative to traditional IPOs, now and in the future, but only for companies whose individual circumstances are truly suited to the approach.
“We had a company that we were talking to that we wanted to go public recently,” Stone said. “Obviously I wanted them to come with us because I wanted to close the deal, but they ended up deciding that an IPO was better suited to their goals. “
“I sat down with Alec (Gores) afterwards, and I said, ‘You know, honestly, if I was them I would have made the same choice,'” he said. “The IPO was more appropriate for their goals.”
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