The fourth liquidity option
Talk to any general partner these days, and they’ll tell you they’re fielding multiple calls each week from SPACs looking to transact with PE portfolio companies. The primary benefit of increased liquidity in the market is that it makes exiting portfolio companies easier. So, the increase in SPACs will offer yet another option for firms in addition to their typical exit routes of sales to corporates buyers, sales to other PE firms and traditional IPOs. Since the beginning of the SPAC boom, approximately 30% of companies targeted by SPACs have been owned by PE firms.
In the US alone, there are more than 2,800 companies currently backed by PE firms that were acquired between four and six years ago, the period during which firms tend to look at exiting. For sellers, a merger with a SPAC can be a compelling option; relative to a traditional IPO, the sale process can be easier, cheaper and faster, with economics that are more certain. And, relative to a trade sale, where there may be just a small handful of appropriate strategic acquirors for a particular asset, the universe of potential SPAC transactors is now huge.
Moreover, firms with US-based assets aren’t the only ones likely to benefit from sales to SPACs. As competition for deals grows, SPAC buyers are expected to look cross-border in increasing numbers, seeking targets in both Europe and Asia.
Not without challenges
For sponsors interested in raising SPACs, they’re not without challenges. Where a typical PE deal is focused on value creation during the hold period, with SPACs, the focus is different: target selection, the acquisition process and the right management team are paramount. Additionally, there may be reputational risks for SPACs that perform poorly such that they impact the sponsors’ broader fund complexes.
Limited partners are watching the current crop of SPACs closely for conflicts of interest, for example, in instances in which a SPAC and a fund might be pursuing the same opportunity or for conflicts of interest in how sponsors manage their time across funds and SPAC vehicles. Some funds are experimenting with ways to share the economics with their LPs, by placing the SPAC inside of the fund or by effectively negotiating a co-investment with the SPAC.
Time will tell the degree to which SPACs remain such a dominant mode of capital formation. Already, the market is seeing a measure of change in SPAC economics as their proliferation spurs more investor-friendly terms, such as lower promotes and longer lockup periods. What’s certain is that whatever happens over the next several months with respect to issuance, SPACs’ presence will be widely felt in the M&A arena for at least the next two to three years.