As SPACs continue to resurge as a force in private/public capital markets, here is what we are hearing.
Key insights
- Private equity groups continue evolving and adapting to market conditions.
- SPACs are widely regarded as a way to utilize key features of both public and private capital markets.
2020 offered several notable developments in private capital markets, including the resilience of the private equity industry as it adapted to the challenges brought by the pandemic and normalized its operating model. Among these developments is an ongoing resurgence of special purpose acquisition company (SPAC) offerings.
What is a SPAC?
A SPAC is a means of taking a private company public. SPACs originated in the mid-90s and were fairly popular until their use faded due to the credit crunch challenges of the late 2000s. The SPAC process is initiated by a sponsor of the SPAC — such as a private equity group — launching an initial public offering (“IPO”) of a company that has no operations, formed with the sole intent of acquiring a private company with the proceeds of the SPAC’s IPO.
SPACs provide a financing solution at the intersection of private and public capital markets, which allow its sponsors to raise large sums of capital for a private company acquisition, open access for the investing public to private equity markets, and afford management of the target private company a longer financial runway to lead to potential company growth.
SPAC lifestyle: formation, target search, and merger
In the formation stage, the sponsor, relying on its track record, provides the IPO opportunity to the marketplace, which comes at a lower cost than the typical IPO underwriting and registration process, as the company underlying the SPAC in its current form has no product or operations. Parameters are set for proper sponsor and investor incentives, and a large percentage of cash is held in trust for the anticipated target company purchase.
During the target search, management typically has 24 months to find a private company to “merge” with, as dictated by the SPAC’s legal documents. This stage includes search and due diligence conducted by management of its target, and the potential raising of additional capital to pay for SPAC costs.
Once management has located a target, shareholder approval is needed for the proposed merger with the target. The process at this point moves forward with various legal and regulatory processes and oversight, while public shareholders of the SPAC are afforded the right to redeem their shares pre-merger. Alternatively, if a target company is not located or the above generally described processes break down within the normal time period of 24 months, the trust is liquidated and proceeds are distributed to shareholders.
How we can help
CLA can help private equity groups realize higher potential at each stage of the investment lifecycle: raising capital, managing the private equity fund and its portfolio, and successfully exiting. Put our M&A advisory and investment banking, financial due diligence, business valuation, and consulting and accounting solutions to work for you.
Securities products, merger and acquisition services, and wealth advisory services are provided by CliftonLarsonAllen Wealth Advisors, LLC, a federally registered investment advisor and member FINRA, SIPC.