Investors like Bill Ackman are bringing Special Purpose Acquisition Companies (SPACs) back into vogue, and while the size and sophistication of these ‘blank-check’ companies is evolving, it is unlikely to signal a long-term structural shift.
Investors like Bill Ackman are bringing SPACs back into vogue and while the size and sophistication of these ‘blank-check’ companies is evolving, it is unlikely to signal a long-term structural shift.
SPACs are currently enjoying their time in the limelight but don’t expect a long-term resurgence. They are merely part of the ‘zeitgeist’ in these weird and troubling times.
Their appeal is real, as evidenced by the decision by Pershing Square’s Bill Ackman to use one of these vehicles, otherwise known as a blank-check company, to seek out a “mature unicorn”.
Ackman is targeting a USD4 billion IPO for Pershing Square Tontine Holdings, according to a regulatory filing made on Monday, with up to a further USD3 billion capital commitment from the hedge fund manager.
This would make it by far the largest SPAC. The SPAC is being offered at USD20 per share (for 200 million units) compared to USD10 per share for a typical blank-check vehicle.
Typically, a Special Purpose Acquisition Company is established and then taken public, even though it owns no assets; hence the moniker ‘blank-check company’. Investors commit their capital and the sponsor has up to two years to find an attractive private company to acquire.
Following completion of the deal, the private company becomes a public traded entity and, all being well, the SPAC’s USD10 share price pops, giving investors a healthy return. Since Michael Klein’s Churchill Capital I acquired Clarivate Analytics in May last year, in a deal valued at USD4.2 billion, Clarivate’s stock price has clicked up to USD22 (at the time of writing).
So far this year, SPACS have accounted for almost 40 per cent of US IPO filings and raised USD6.5 billion through 20th May, according to PitchBook.
SPACs are not new, and have gone through various iterations, but irrespective of this, their popularity during a Covid-impacted market, has still been surprising.
“This is as popular we’ve seen them in a long time,” one New York-based source tells me.
“Goldman Sachs has done a bunch of them, Dan Loeb’s Third Point has done one and now we are seeing other established names like Bill Ackman starting to use them. I think you will see more names like these jump into this space, while it remain a popular choice of vehicle,” says the undisclosed source.
By their intrinsic nature, hedge fund managers are competitive to their core. The more big name managers use them the more capital will be attracted and the bigger IPOs will become, creating a virtuous cycle.
The SPAC is a very interesting product. An investor’s capital is safely locked away in an escrow account. If they don’t like a deal they liquidate their position. In that sense, it offers very little risk.
For the most part, for both sponsor and investor, it’s a free play on the market roulette wheel, and a chance to make some real upside.
“It’s an opportunity for some of the big name hedge fund managers to operate in a different space and be king of the hill by being able to close a successful deal with one of these SPACs,” says the undisclosed source.
The popularity of SPACs is evidenced by the IPO numbers, which continue to inflate.
Social Capital Hedosophia Holdings Corp III exceeded its initial IPO target of USD600 million when it announced in April that it had increased it to USD720 million on the back of strong investor interest. Although slightly earlier in the year, Churchill Capital’s third SPAC locked in USD1.1 billion when it IPO’d in February.
If Ackman’s USD4 billion IPO is successful, it will represent a meaningful step up in size.
For fundamental investors like Loeb and Ackman, using a SPAC as a way to take a company public plays to their skillset and makes a lot of sense to avail of in this current market.
They don’t necessarily lend themselves to all hedge fund managers, however. If others jump on the bandwagon, the USD64,000 question any investor should ask themselves is, ‘Does this sponsor have the skill, the nous, to find the right target company?’
It is not inconceivable that SPACs will continue their purple patch, and IPO numbers grow even higher, but it is unlikely that this would signal any long-term permanent change in the SPAC marketplace.
“I am hearing on the Street other hedge fund managers thinking about using blank-check companies. Loeb and Ackman are the most prominent names and I think you’ll see others follow. But I don’t see the market changing to such an extent that SPACs suddenly go from USD500 million to USD3 billion,” remarks the undisclosed source.
For now, it seems the market conditions could well be propitious for deal making.
Michael Klein’s third SPAC, which as mentioned earlier only went public in February, has already announced plans to merge with MultiPlan, a US healthcare technology provider owned by the private equity firm, Hellman & Friedman, in a deal worth USD11 billion. Klein has yet to close a deal for Churchill Capital Corp II.
The MultiPlan deal will have caught the attention of hedge funds and private equity groups alike, who themselves might view SPACs as an opportunistic vehicle to deploy some of their dry powder; which has grown to something akin to Europe’s infamous butter mountain of the late 70s. It remains north of USD1 trillion, last time I looked.
Some will be enthused by the success of SPACs this year, and will look to throw their hat in the ring. And why not, if investors see the merits of committing capital to what potentially could be a future FAANG?
“As long as the product stays hot, I think you’ll see more high-profile managers looking to establish one of these vehicles – especially while the likes of Klein are succeeding,” observes the undisclosed source.
Conceptually, the SPAC almost sounds too good to be true. But if we see further successes over the coming months, the IPO pipeline is likely to remain strong.
It’ll be interesting to see if other big name hedge funds enter the fray. If they do, it will depend on them looking in the mirror and embracing that well-used motto, ‘Carpe Diem’.
Who knows what investor demand might look like a year from now?
