On November 24th, Burson Cohn & Wolfe (BCW) brought together experts from across financial services to discuss current activity and prospects for special purpose acquisition companies (“SPAC”). The discussion was moderated by Gus Okwu, an EVP in BCW’s Corporate Group with a focus on financial communications, and the speakers included:

• Eklavya Saraf – Global Head of SPAC Listings at NASDAQ
• Eric Gomberg – Head of SPAC Banking at Odeon Capital Group
• Ivan Ross – Co-founder and Partner at Ardea Partners
• Jen Dong – Head of SPAC Listings at NSYE
• Simon Watson – Managing Director at Goldman Sachs
• Yvan-Claude Pierre – Partner at Cooley LLP

The group covered a wide range of topics during the 90-minute session, including three key themes highlighted below.

What’s Driving the Interest in SPACs.
A SPAC, or “blank check company,” is a corporate vehicle created for the sole purpose of acquiring an existing private company and taking it public within a specified time frame. Once a business target is identified, and the merger is publicly announced, the SPAC’s sponsors and the business target’s founders face the added pressure of completing the deal within the specified completion window. SPACs are formed by sponsors with experience and reputations that allow them to identify compelling target businesses that will become successful public companies. The bankers on the panel shared the belief that the quality of SPAC sponsors has increased as private equity firms, successful dealmakers and well-regarded VC investors launching their own SPACs. Names such as Bill Ackman, TPG and Chamath Palihapitiya have entered the space with some new serial SPACers. Additionally, a number of high-profile SPAC success stories, such as DraftKings, have brought attention to the space and attracted interest from institutional investors and an active base of retail investors.

Market volatility, a low interest rate environment and disillusionment with the IPO process, have made SPACs an attractive alternative for private companies looking to go public in recent months. According to Odeon Capital Group research, as of December 2, 2020, 210 SPAC IPOs had been completed representing gross proceeds of ~$72 billion. On that run rate, the total amount of funds generated through SPACs in 2020 will exceed the aggregate amount raised over the last ten years.

Going Public via a SPAC vs. an IPO or Direct Listing.
All of the speakers agreed that private company founders are increasingly evaluating SPACs as a public market exit alternative to IPOs and direct listings. Over the last two years, direct listings were in vogue for private companies and VCs evaluating public market exits. More private companies have chosen to remain private for longer periods due to the availability of capital from VC and private equity funds. For many private companies during that period, a capital raise was not the primary focus, which meant that a direct listing represented the most efficient route. Direct listings were simply a liquidity event for private investors and employee shareholders until the summer of 2020. At that time, the SEC decided to allow private companies to raise capital through direct listings.

The bankers also agreed that the IPO and SPAC process offer a better vehicle for accessing capital liquidity in the public markets. While the inefficiencies of IPO pricing and a higher cost of capital concern private company founders, a SPAC allows for more creativity during the structuring process. This results in greater certainty around price discovery as a company’s valuation is negotiated and agreed at the time of signing the merger agreement. Compared to the IPO process, where pricing is only determined at the conclusion of the roadshow process, after discussions with potential institutional investors, the SPAC pricing regimen is more efficient and precise. A consideration that is difficult to value companies, or those in industries marked by regulatory uncertainty, such as the cannabis space, will find useful.

Other benefits to deploying a SPAC include:
• Additional capital can be raised by the SPAC through PIPE (private investment in public equities) transactions.
• SPACs provide an opportunity for the target company to communicate directly with investors given the different disclosure requirements compared to an IPO. Financial projections can be shared directly.
• SPACs offer a shorter timeline to going public than an IPO.
• Private company founders can focus on the operations of the business and allow the SPAC sponsor to drive the going public process.

Communicating SPACs and their unique deal structure to investors.
SPACs require a specific and strategic playbook to effectively market the deal to investors given how they uniquely feature elements of an IPO, an M&A transaction/reverse merger, and a proxy contest. First, it is important to remember that there are no restrictions on communications, meaning no “quiet period,” throughout the entire SPAC process—another unique feature relative to an IPO. Consequently, the overarching communications strategy to external audiences, most notably a prospective investor base, should be proactive and focused on maximizing media coverage and engaging with sell-side analysis. It is best practice to think about communications in three stages: first, the initial SPAC formation and IPO; second, the identification of the target private company; and third, the target acquisition and/or merger process. Once the deal is closed, the formerly private company will have a new name, new stock ticker, and new management, board and business model. Companies will want to do all they can to build awareness ahead of this milestone and then leverage the re-listing to kick-off their campaign as a new organization in front of external stakeholders, media, and investors. This process can be done with the support of a trust advisor or consultancy, as well as by leveraging the resources provided by the exchange on which the company will be listed. Key considerations from an investor communications perspective include:

• Investor relations and communications is critical given the short timeframe of the SPAC process. SPAC sponsors and management teams need to have an investor and media communications platform in place to move quickly and adjust to their new obligations as a public company.
• Once the business target is identified, and publicly lists, there will be a rotation of shareholder positions as short-term focused hedge funds and retail investors cash out. An investor relations team needs to be prepared to fill those positions with fundamental, long-term institutional investors.

All of the speakers agreed that the SPAC trend does have legs and is likely here to stay as more private equity and VC firms recognize the investment opportunity and use the SPAC structure to take their private holdings public. Overall, SPACs offer a viable route for private companies to generate liquidity and shareholder return, and BCW’s financial communications team is here to help.

Yvan-Claude Pierre

Posted by Cooley