After attracting little attention in the previous 10 years, SPACs became ubiquitous in 2020. These blank-cheque vehicles raised $83.4 billion in 2020, compared with $3.9 billion in 2015, according to SPAC Research. The mania shows no signs of abating, with about $42 billion raised by SPACs as of early February.
There are a few benefits to employing a SPAC. It allows sponsors to list a company more quickly due to fewer regulatory hurdles and less disclosure. They can also tap a potentially huge source of capital from retail investors, who, in the US, can buy a unit of a SPAC for just $10. This has not gone unnoticed by the secondaries market.
“You should be able to raise a SPAC to invest in some form of GP-led restructuring,” says one senior New York-based buyside source.
A quick poll of secondaries advisors suggests that lots of conversations are going on, with little action, as yet. Several practical obstacles stand in the way, depending on which side of the Atlantic you are on.
In the US, SPACs are only allowed to merge with a single company, not a portfolio of companies. So if SPACs were to be used in GP-led processes, they’d have to be limited to single-asset deals.
“[A SPAC] would work a for a single asset deal, but I’m not sure it’s ever been done for a portfolio,” says John Daghlian, private equity funds and secondaries partner at law firm Akin Gump. “Having said that, there is so much US capital available, it is worth seeing if the boundaries can be pushed.”
Under UK listing rules, share trading is suspended between the time a SPAC signs a deal and the final close, which could be a period of months. If SPAC shareholders do not like the acquisition target, they cannot trade out until the suspension is lifted, unlike in the US. This, and the much smaller size of the market, has stopped it from taking off in the same way as we have seen Stateside.
Still, there is no regulatory or structural reason why a SPAC cannot be used to invest in a GP-led deal in the UK, says Harry Keegan, corporate partner at Akin Gump. “If you start by buying a portfolio, you could structure it so selling LPs could get listed shares in the acquiring vehicle or do a vendor placing of shares to raise cash to pay to LPs who want a cash out. You could even launch the vehicle on AIM [on the London Stock Exchange] because that is a relatively fast process, then move it up to the main market later.”
Secondaries Investor understands that some late-stage venture and growth managers have expressed interest in such deals. Still, secondaries buyers may ultimately be discouraged by what’s seen as weaker alignment between the sponsor and LPs in a SPAC, compared with GP-led deals.
“Getting liquidity via a SPAC is a sell decision,” says a New York-based managing director with a boutique investment bank. “Single-asset [secondaries] buyers are looking for GPs to make a buy commitment with applicable alignment and longer hold periods. I’m not saying we won’t see [a SPAC secondaries deal] tomorrow, but it’s a high bar.”
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