Driven in part by successful deals at local companies such as the Gores Group and Harry Sloan’s SPAC Eagle series, a host of big business and investors are embracing the approach.
SPACs accounted for 35% of U.S. IPOs through June 2020, according to Silicon Valley Bank. Combined, the vehicles raised $19 billion in the first six months of this year, more than the total raised in the six years from 2010 to 2016.
Among those deals were a series of homegrown moves that made headlines, such as Draftkings Inc.’s $3.3 billion merger with Diamond Eagle Acquisition Corp. and planned multibillion-dollar SPAC mergers for electric vehicle makers Canoo Inc. and Fisker Inc.
The growth in popularity of SPACs has only accelerated as the Covid-19 pandemic has continued, prompting some industry watchers to wonder if this is the start of a new paradigm in public markets – or a SPAC bubble waiting to burst.
Came from the cold
Also known as blank check companies, SPACs are business entities that have no activities of their own. They are created to raise funds through initial public offerings. Managers then use the funded vehicle to acquire a target company that is seeking to go public in a reverse merger.
SPACs have recently become known as a way to raise public funds faster than through a traditional IPO, especially for high-growth capital.
intensive enterprises. One of their main advantages is that they often have lower levels of short-term uncertainty because most funding is already locked in before the target company goes public.
However, blank check companies haven’t always had such a rosy reputation.
A decade ago, they were often seen as a way for companies with unconvincing investment prospects to sneak through the IPO process.
“At first, SPACs had a bad reputation,” said Sloan, a former chief executive 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 the SPAC guys when we started this in 2011,” Sloan said.
Sloan said he and his partner, former CBS Entertainment Group chief executive Jeff Sagansky, had to rely heavily on their own reputations and industry expertise to win over investors early on.
“What we said was, ‘We’re media guys. We’re going to bring you what we know,” Sloan said. “If something goes wrong with the management of the company, we could temporarily step in as media managers.”
“I don’t think people would have invested with us without our expertise,” he added.
Most of Sloan’s SPAC deals have targeted companies with at least some ties to the media and entertainment space. His latest play, a $3.5 billion merger between his Flying Eagle Acquisition Corp. SPAC and mobile gaming platform Skillz Inc., is betting on esports as a future pillar of the entertainment industry.
In the past, many SPACs followed a similar pattern of relying on the industry expertise of their sponsors to attract investors, although generally with less success than Sloan’s efforts.
Three years after Sloan lifted his first SPAC, another group of local negotiators was looking to redefine that decades-old approach.
Mark Stone of Beverly Hills-based private equity firm Gores Group said he and company founder Alec Gores began exploring SPACs as a potential way to grow beyond private equity offerings. traditional.
“SPACs didn’t have a good reputation (at the time),” Stone said. “We decided the vehicle was not faulty but people hadn’t executed appropriately for it. … We thought we could do it right.
Stone, who now leads Gores’ SPAC practice, said the relatively small size of most older SPAC investment pools meant vehicles were often only able to target companies below investment grade.
“We said, ‘Let’s reverse it, look for companies over $2 billion (enterprise value) – what we call the middle market,'” Stone said.
Rather than relying on personal knowledge of the industry, Stone’s strategy was to bring in large pools of capital that would attract companies with strong growth trajectories. His company would add additional investors through private equity investments, or PIPE, both by increasing the total capital available and by building investor confidence by adding top institutional players to deals.
Over the next five years, Stone led six SPAC 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 increasingly focus on SPACs in recent years, although Stone said the company also remains committed to its traditional private equity business.
The participation of players like Gores Group in the SPAC space has had effects beyond changes in the strategies of individual companies. As SPAC sponsors became more well-known as established and reputable market players, blank check companies began to shed their long-standing dubious reputation.
“It certainly helped improve the image of SPACs,” 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 key to the sea change surrounding SPACs.
“In a traditional SPAC, the sponsor will have a seat on the board,” Sachs said. “If a company is going to give it up as part of their IPO, they need to make sure it’s someone they want to work with long term.”
This reputational boost laid the foundation for what Sachs called the “perfect storm” for SPACs to take off once the Covid-19 pandemic hit.
“Economic volatility and sharp price declines 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 government markets.”
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 SPACs have emerged as one of the most viable ways for these companies to invest their funds quickly and take advantage of the strength in stock markets in recent months.
“SPACs have certainly benefited from the pandemic,” Sachs said. “That’s partly why we’ve seen the growing number of SPACs coming, as well as why some big institutional players are getting into it.”
Predictions on where the current
“What happens through the end of the year, especially with all the uncertainty surrounding the macro environment, will determine the future of SPACs,” said Robby Kumar, chief executive of Silicon Valley Bank based in Santa Monica. “It goes back to the performance of this cohort (of SPAC), which is so different from previous groups.”
Kumar’s bank is bullish on SPACs and included in its third quarter “State of the Markets” report this prediction: “If SPACs and direct listings continue to be adopted, the traditional IPO route could eventually become obsolete.”
Kumar said he thought such a drastic change was unlikely, but added that SPACs could become a mainstream alternative to IPOs if the current cluster of deals go well for companies and investors.
Stone of Gores Group is somewhat less convinced that the current trajectory of the SPAC market is sustainable. “I think there is a danger that the SPAC market will be oversaturated,” he said. “It won’t surprise me if there’s a lot of carnage.”
Stone said he sees SPACs as a solid alternative to traditional IPOs now and in the future, but only for companies whose individual situations are truly suited to the approach.
“We had a company we were talking to that we wanted to go public with recently,” Stone said. “Obviously I wanted them to go with us because I wanted to do the business, but they ended up deciding that an IPO better suited 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 purposes.”