A "Blank Check" is All the Rage

A SPAC is essentially a shell company, created specifically to raise money through its IPO for an acquisition, with the target unnamed until the acquisition is announced (or “de-SPAC’d”). Since the target company is unknown to SPAC investors, SPACs tend to be created by large institutional investors or high-profile corporate leaders with a track record for delivering return on investment. Rather than waiting, some companies looking for access to capital have begun searching for SPACs that might acquire them.

While the concept of the “blank check company” has been used for decades, conditions in 2020 created a wave of SPACs that began to rival the traditional IPO market. This correlated with a noticeable increase of high-profile sponsors with the likes of Pershing Square, Apollo and Bain Capital, to name a few. Questions remain about the future of the SPAC market—some believe the financial instrument has lasting power, while others see its recent success as a fad that will eventually wane. More than 300 SPACs are currently searching for a target, and more startups will go public through the de-SPAC process in the coming months.

In early November, Brunswick Senior Advisor Stephanie Wakefield spoke with Ms. Marvin about the record-setting year for SPACs in 2020 and her predictions for 2021.

We’ve been a bit surprised at how massive the shift toward SPACs has been this past year. What do you think has really driven this sudden trend? Is this the beginning or has it peaked?

It’s not just one thing. It’s the confluence of a bunch of different things. But the long and the short of that result is it opened the eyes of a lot of people about the SPAC product as a truly viable IPO alternative. In prior years, there’s been a real lack of understanding about how they work. It’s a challenging product for people to understand.

Chamath Palihapitiya kicked it off a little bit. He is a very high-profile dealmaker and savvy marketer. When he announced Virgin Galactic—July of 2019 and they closed in October of 2019—he was all over the financial press. It was a very high-profile deal that performed very well, and it got people’s attention. They were going, “Well, hey, if Chamath is doing a SPAC, maybe I should look into this.” It got the conversation started.

The next thing that happened obviously is COVID—it had an influence on the SPAC market for a bunch of different reasons. One, the traditional IPO market is inherently risky to begin with. You could put together an IPO prospectus for six months or even longer, go on the road, and still have no idea how much money you’re going to be able to raise. In fact, sometimes you don’t raise any money at all—look at WeWork, for example. It’s an inherently risky process. It’s even riskier in a pandemic and even more risky in an election year.

When COVID hit, the traditional IPO market clamped down shut. But for the most part, the SPAC market remained far more certain. The shell company is already public, so there is a reasonable amount of certainty on how much cash you’re going to be able to get at closing. That’s much more appealing to a company in this type of environment.

Plus, in the past, a lot of these so-called unicorns didn’t have to necessarily go public early in the life cycle because the private market funding was just so abundant. But with COVID, private market funding dried up, too. However, these companies still needed a capital infusion of some sort.

It used to be a company would go public at an earlier stage and investors would be able to capture that growth from IPO to when the company became a large-cap company. Problem is, in the most recent past, those companies would just be funded by late-stage VC rounds and go public at a much later stage, so only a very few private investors could capture that growth. The SPAC this year has sort of inserted itself in that process as a means for earlier stage companies to go public. And now investors are able to capture that growth again. It democratized the IPO process for investors.

There’s also a key difference between the SPAC process now and in the past, in the vote and redemption process. Back in the 2000s, it used to be that you could only redeem your share if you voted “no.” Now, you can vote “yes” or “no” and get your money back. By removing that sort of barrier, it made it safer for sponsors since it reduced the risk of their deal getting voted down. That brought in a much better-quality sponsor. And that’s why you’ve seen, since 2015, the quality of sponsor and SPAC team has really improved. And that is also largely responsible for SPACs garnering so much interest, particularly this year.

This year, I get questions about these pre-revenue companies, these electric vehicle companies. I think people forget that that’s how companies used to go public in the past. It’s a bit of a return to the way that capital markets used to function. I think we’ve just gotten very used to billion-dollar unicorns going public. The ’90s and the 2000s had a lot of companies going public at a much earlier stage.

Is there a typical size criteria for SPACs that makes sense for the target companies?
It all depends on the size of the target companies the team hopes to acquire. We have small IPOs around $40 and $50 million. We have very large IPOs like Ackman’s—$4 billion. So, if the size of the typical company you hope to acquire is only $500 million, obviously a $1 billion SPAC is too large. Typically, a SPAC is looking to buy a company with a fair market value—somewhere between three and five times the size of what’s held in trust. If you see a SPAC buy a company the same size as its trust, it’s probably not a good deal, unless they forfeit or cancel a significant portion or most of their promote. Otherwise, it’s just way too expensive for the company—too much dilution. You really want to look for a much larger company to dilute down that promote.

Is there a typical dynamic where companies’ management teams should be thinking, “Wow, we could be a SPAC target”?
I started working on SPACs in 2005 and even up to a couple of years ago, people were still like, “What the heck is a SPAC?” This year, you have every single board that is thinking about going public requiring the CEO have a game plan, and it needs to include a SPAC scenario. It used to be SPAC teams approaching companies. Now it’s companies—they’re all exploring the SPAC option because of the board’s fiduciary duty to consider all alternatives.

How do you see the differences between de-SPAC versus IPO, and what should management teams really be thinking about as they consider what their road map should be?
A SPAC is not for every company. It’s just another tool in the toolkit for going public. The things that they would have to consider are things like speed to market. You have to consider the environment. Is there a certain amount of cash you need? You need to take into consideration the long-term game plan of the company.

One of the big advantages of a SPAC is you can market the deal based on projections. I’ve always thought if a traditional IPO wanted to be competitive, they should be allowed to market based on projections. A SPAC is viewed from a regulatory standpoint as an M&A transaction versus an IPO, which has different regulatory standards. People think there is less regulatory scrutiny with SPACs, but it’s actually the opposite. There’s a proxy process, and that generally takes about three months.

So if you look at it through the lens of a traditional IPO—the bankers and the teams and the lawyers put together an IPO prospectus and you generally only have a week to two weeks to market the deal. So that means investors only have a week to two weeks to review all the financials and everything that’s included in the IPO prospectus and to make a decision. Sometimes not even that long. Sometimes an investor is meeting with the company the day before or the day of pricing.

With a SPAC, a deal is announced, then you file a proxy. Investors then have roughly a three-month window while the SEC is reviewing the proxy to review and ask questions and do due diligence on a SPAC transaction. And everything that is included in the proxy is similar to an IPO prospectus. So it’s an M&A process versus an IPO process.

We spend a lot of time thinking about how to help companies get ready on the communication side, as well as the investor relations side. Do you have any tips for how to help them think about it and understand the urgency? 
The power of good IR and good marketing. And can you get someone to write on it? It’s generally pretty challenging to get a Wall Street equity research analyst to cover these companies until they’ve de-SPAC’d. The best thing a SPAC and company can do is to hire a good IR firm.

There have been a couple of SPACs where the announcement is the most important part of a SPAC’s life and some companies have kind of dropped the ball. They’ll put out a press release but without a presentation. Or the press release is just so poorly written that no one can make any sense of it. Or if you don’t have a Ph.D., you’re just not going to understand it. Plus, now you have to consider retail which is looking at these stocks. How do you sell it to retail? That gets reflected in the share price.

What do you see as being the biggest surprise for management teams as they’re going through a SPAC process?
The biggest surprise is how much work it is, and the fact that it’s a real public company. And there’s a lot of regulation and compliance that comes with that. Yes, it’s a shell company. There’s no operating company to speak of. But it’s still a public company. There are a lot of reporting requirements. And if you don’t have the infrastructure to handle it, or if you’ve never run a public company before, it’s a huge surprise.

And the biggest surprise for targets?
The whole redemption process around the shareholder vote. However, that’s usually a bit different if there’s a backstop, or if there’s a forward purchase associate with the deal, meaning you don’t have to worry about it as much. When you negotiate with a SPAC, it’s basically just the company and the SPAC team. You’re deciding on the valuation. And you think that’s it. Then all a sudden, it’s like, “Oh, surprise! Shareholders have to vote! And they get to vote with their money.” Which is why backstops are so popular because it just makes the posture of negotiations that much easier.

So, yeah, the redemption process is usually a big surprise for target companies. And sometimes it’s an unpleasant surprise.

Is there anything they can do to prepare for that? Or to avoid the surprise?
Be realistic on valuation, make a really good announcement, market the hell out of the deal. Get a good IR firm. The average quality of sponsors has gone up for sure. But in any product, not everything can be a winner.

What about fees related to SPACs: Are they in line with traditional IPOs? How do you see the fee structure working?
If you look at the underwriting fees, it’s only 2 percent up front and a 3.5 percent success fee on the backend, so it’s not that big.

What they’re talking about is the backend and the sponsor’s promote, right? That 20 percent slug of equity that the company has to swallow, which is why a SPAC typically tries to buy something much larger so that it’s a much smaller portion of the total overall pie.

And the other thing, too, is sometimes you have to bring on financial advisors. And, obviously you have to bring on M&A lawyers. That all gets expensive. On the whole, it’s probably equal. And that happens, actually, quite frequently. The company will negotiate that the sponsors cancel a portion of that promote. You know, just to whittle it down even more because they just don’t want to give away that much of their own company. Or sometimes they’ll push it to an earn-out or something like that.

But that’s sort of the beauty of the SPAC, right? It’s negotiable. You can kind of play with it a little bit and figure out what makes sense for everybody. But is it expensive? Yeah. Going public isn’t cheap no matter which path a company takes.

Where do you think we are in the SPAC cycle and what do you see in the next couple years in SPAC? What’s coming up for SPACInsider? 
The SPAC is here to stay. Like anything else, you’re going to see a little bit of cyclicality. But it’s now a real viable alternative that companies can use to get public. It’s been legitimized this year. It’s not going away.

Regarding SPACInsider, I’ve launched the latest iteration of SPACInsider 2.0, adding a lot more functionality for users and things of that nature. But long, long term, I am very interested in the primary direct listing, which is a direct listing but with a capital raise. Previously you could only direct list existing shares. I do think that will be a very interesting product for a certain type of company. If a primary direct listing becomes a true viable alternative, I think the traditional IPO goes away for most companies that are enough of a size and have high visibility and do not need to be marketed by a bank. I think the traditional IPO will be the domain of the smaller companies, sub a billion. But then they’ll still be considering a SPAC as well. I do think if a well-known company had the option of doing a primary direct listing versus a traditional IPO, they’ll probably opt for the primary direct or regular direct.

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Stephanie Wakefield is a Senior Advisor with Brunswick, based in San Francisco and specializing in market and investor relations strategies. With over 15 years’ experience in global investor relations, she currently serves on the National Investor Relations Institute’s Advocacy Steering Committee and its Future of IR Think Tank.

Additional reporting by Mishaal Khan, an Associate in San Francisco, and Hollis McLoughlin, an Executive in New York.