The popularity of SPACs has soared in recent months, as investors take advantage of the easier path to going public than a traditional initial public offering. Fund service providers, such as Genstar-backed Apex Group, offer private equity firms a wide range of services to assist SPAC deals, including: registration services, company directorships, outsourced COO, regulatory reporting, accounting, compliance and ESG screening of potential acquisitions for SPACs. Mergers & Acquisitions spoke with Georges Archibald, head of Apex Americas, about PE equity trends in SPACS.
Why are SPACs attractive options for private equity?
Private equity is sitting on an estimated $1.5 trillion in dry powder, but they’re also contending with today’s market volatility. We’re at an inflection point right now. Are we set to suffer a downturn due to the damage wrought during the pandemic? Or are we set for inflation as the economy starts up again? Economic conditions are rapidly evolving, and private equity managers want to take advantage of these changing trends. But they have to move quickly, which makes traditional, lengthy IPOs a sometimes less attractive option. As SPACs don’t have the same long lead-times and other structural advantages, they are an appealing option for managers looking to take advantage of the markets right now.
What are the benefits of SPACs?
SPACs are usually a quicker way to deploy capital. They’re also a way to join incredibly successful asset managers. If there is alignment with your SPAC sponsor, it’s a great way of supporting your growth thesis. Of course, SPACS also offer downside protection given mechanisms available to create additional liquidity.
What are the regulatory obligations?
SPACs have specific administration requirements. Investors avoid the overhead of a roadshow and many other concerns that dominate IPOs, but this also creates unique compliance challenges. Investors can claw back their shares and/or sell their warrants. If sponsors need private investment in public equity, or PIPEs, there are a host of other regulatory obligations to follow. A SPAC is a merger and acquisition where the LOI period can be very dynamic. Perhaps the biggest consideration in a SPAC deal, however, is time. The two and three-year deadlines for transactions and combinations put very real pressure on sponsors to identify and follow through with target companies.
What role do fund services play?
Fund administrators can expedite the process by freeing up sponsors and investors who want to raise capital and start sourcing and evaluating targets quickly and flexibly at a time when market conditions are dynamic. Each SPAC investor needs to receive statements and their capital allocations must be placed in escrow accounts amongst other requirements. Coordinating with underwriters, counsel, auditors, trustees, insurance and others in this eco-system is a cumbersome but vital exercise needed to ensure success. Sponsors and fund managers want to land cornerstone stakeholders – the big and trusted names that move markets – and identify acquisition targets. Their skills are rooted in analysis, dealmaking and value creation. The best financial services firm providers will embower them by removing bottlenecks and adding to workflow transparency.
What’s next for SPACs?
We can expect some normalizing in 2021, at least in terms of the attention they attract. Goldman Sachs may have called 2020 the year of the SPAC, but that doesn’t necessarily mean we’ll see a major reduction in them in 2021. In fact, it’s probably the opposite. SPACs are continuing to be a popular option. Private equity is especially turning to SPACs when they find opportunities that aren’t best realized through the traditional IPO markets. The reopening of the post-pandemic economy is certainly going to shake things up and continue to create those opportunities.