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SPAC Activity Picks up After Pause

A panel of experts discussed the current state of the SPAC market and where it’s headed during a virtual panel hosted by ACG and sponsored by Grant Thornton LLP.

Kathryn Mulligan
SPAC Activity Picks up After Pause

After their meteoric rise hit a snag this spring, special purpose acquisition companies are making a comeback with new listings, despite questions about the long-term viability of this path to public markets.

A panel of experts discussed the current state of the SPAC market and where it’s headed during a virtual panel on June 2 hosted by the Association for Corporate Growth and sponsored by Grant Thornton LLP, an independent audit, tax and advisory firm.

Scrutiny from the Securities and Exchange Commission slowed activity in the SPAC market this spring, but it has picked up over the past several weeks. SPACs raise money through an initial public offering with the promise to merge with a company, effectively taking target businesses public.

The recent uptick follows an active period for the SPAC market over the past several years. In 2020, approximately 250 SPACs were raised, and about 430 SPACs are looking for a deal currently, according to data cited by Sean Denham, national SPAC leader for Grant Thornton and moderator for the panel, titled “SPAC: The Quick Alternative to IPO.”

Entering the public markets via a SPAC has distinct advantages over an initial public offering or direct listing, according to panelist William Haddad, partner at law firm Venable LLP. For one, the process can be faster. Negotiating the business combination agreement, performing due diligence on the target, and effectuating a PIPE—private investment in public equity—all can be done in parallel. PIPEs have become a “critical” component to a SPAC transaction, Haddad added, effectively securing capital for the deal and reducing uncertainty for the target company to help speed the process along.

“If the markets are receptive to the PIPE, and people work hard, all of that can be done in a month,” Haddad said.

That speed can be attractive to a target company, as can favorable structures, particularly for early-stage companies merging with a SPAC. In a traditional IPO process, a company’s value is determined during a roadshow and based on “where the world is, and where the market sees your company that week, at that moment of pricing,” Haddad said. A SPAC merger allows for more flexibility. A target might negotiate earn-outs, for example, or other forward-looking structures.

Another element contributing to SPACs’ popularity is the quality of sponsors and experienced investment teams the market has attracted in recent years, according to Haddad, who has worked on SPAC deals since 2005.

Combined, those advantages helped to draw in new SPAC issuers, ranging from veteran investment groups to celebrities, but they weren’t the only ones paying attention. This spring, the SEC began looking more closely at SPACs.

“A lot of investors believe the SPAC market will have to stay because of the private equity market. There’s an alternative for private equity to cash out and not sell to another private equity firm. Really, SPACs are just another vehicle.”

William Haddad

Partner, Venable LLP

Denham described the agency’s comments in January cautioning investors about investing in celebrity-affiliated SPACs based on star power alone as the “first shot over the bow.” In March, the SEC sought information from investment banks about the processes and controls they consider when taking on SPAC sponsors as clients and taking vehicles public. Then, on April 12, the SEC questioned whether warrants associated with SPACs’ common stock should receive equity treatment—or whether liability treatment would be more appropriate—effectively chilling the SPAC market for about four weeks.

Even before the SEC’s heightened scrutiny, SPAC issuers faced a different hurdle, in the form of directors and officers (D&O) liability insurance, whose high cost came as a surprise to many. SPACs must obtain D&O coverage in order to attract high-quality board members and management teams.

“To say it’s challenging is in many ways to say it’s expensive, and to also say that there’s limited capacity,” said Kristin Kraeger, managing director in Aon’s national D&O practice and a member of the firm’s SPAC Task Force.

The surge in SPAC popularity last year created significant demand for D&O coverage, something underwriters hadn’t anticipated. The result was a drastic increase in the price of coverage.

“In D&O vernacular, we talk about things in price per million. The price per million for a June 2020 deal was about $20,000 per $1 million; today, that number is 4-5x that,” Kraeger said.

She added, “That is a tremendous amount of pressure on the market—unexpected and quickly.”

Kraeger noted that there’s been a “flight to quality” when underwriting D&O policies for SPACs. Groups that can highlight in their underwriting meetings a thorough due diligence process, experienced management team, public company readiness, and an ability to execute will be in the best position to secure competitive pricing for their D&O coverage.

Those attributes will also help a new SPAC be successful generally in a market that has become increasingly crowded. Most importantly, a SPAC needs to have access to businesses to buy.

“The first three important things, in my view, of doing a SPAC and being successful at it is: deal flow, No. 1; deal flow, No. 2; and deal flow, No. 3,” Haddad said.

He doesn’t view the market as overly saturated. “There is room for SPACs that are out there and many of them will be successful,” he added.

Dynamics within private equity could play a role in SPACs’ future. Funds are under pressure to exit their portfolio companies and earn a high return, and increasingly, they’re selling to each other. With SPACs, they have another option.

“A lot of investors believe the SPAC market will have to stay because of the private equity market,” Haddad said. “There’s an alternative for private equity to cash out and not sell to another private equity firm. Really, SPACs are just another vehicle.”


Watch the full panel discussion:

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Kathryn Mulligan is the editor-in-chief of Middle Market Growth.