Advice and expectations – steps to a successful SPAC deal
Following the global outbreak of the Covid-19 pandemic in March 2020, the private capital industry saw a significant build-up of dry powder. Special purpose acquisition companies (SPACs) provided an outlet for these funds. However, sponsoring firms need to consider several factors to be well-prepared for launching a successful SPAC.
Zac McGinnis (pictured), Managing Director, Riveron, comments on the opportunity SPACs provided, particularly in the context of 2020: “A SPAC offered investors a vehicle to take advantage of the built-up dry powder. This type of investment is based on investors’ trust in a management team. When investing in a SPAC, investors are trusting that management team to use their money in their best interest and to complete the task within 24 months.
“However, SPACs have opened the public up to a new level of risk. Investors who haven’t navigated the SPAC lifecycle before could risk losing everything. They may not understand this when investing in a SPAC, which is a downside of these types of vehicles.”
This additional risk underscores the importance of robust advice and support when making financial decisions.
Access to advice
It’s not just retail investors who need good advice. SPAC sponsors also need to make sure they are working with the right partners to help them through the process.
The sponsors’ primary challenge is to get target companies healthy, from an organisational perspective, to allow them to go public. However, in addition to accounting, cash management and internal controls, McGinnis outlines: “It is crucial to get the entire organisation to march to the same beat and that takes a lot of time.”
Having competent attorneys and other third-party partners is critical for sponsors to be best prepared for the SPAC process. “The right strategic advisors can help sponsors decide which path to take and what benefits each route could offer. Most sponsors are very good at raising capital among institutional investors but they may not be fully prepared to handle the back office organisation necessary to get a company ready to be publicly traded,” McGinnis notes.
The importance of making sure the team around the sponsor and the target is right should not be underestimated. This eco-system can also help manage the sponsors’ expectations of the SPAC process. McGinnis explains: “Given the simplistic nature of a blank cheque SPAC company, many sponsors think audits can be done very quickly. So, the fact that it takes three or four weeks sometimes comes as a surprise.
“Although the nature of the entity is blank cheque in nature, the process still resembles that of a traditional IPO in the US. However, with a SPAC, there is an additional time crunch of two years to complete an acquisition from the IPO date. Similar to a traditional IPO, sponsors need to take certain steps to file with the SEC and obtain a team of advisors to guide them through the process.
A strong sense of identity
McGinnis warns sponsors not to be unduly influenced by the time constraints: “Sponsors should remain strong in the identity they set for themselves at the beginning of the process. They sometimes might be tempted to change the way they define themselves to expedite the deal but changing tack this way is very disruptive. It can cause confusion and time delays and potentially lead to the deal collapsing.”
In addition, the diligence and disclosures provided in preparation for a SPAC deal expire. Therefore, the process needs to move at pace to effect a business combination with an operating company within 18 to 24 months. McGinnis gives an example of what can happen if this timeline is not adhered to: “We had one client whose clock expired and had to return all their investors’ capital because they weren’t able to close a deal. So, the repercussions can be fairly dramatic if the sponsor is not well prepared to move ahead with a transaction.”
To alleviate this potential problem, McGinnis suggests: “Sponsors can start shopping early – as much as they are allowed to, legally. They can start thinking about what target companies they will need to perform due diligence on. For example, sponsors can undertake desktop reviews of target companies’ financial statements which can help to realise maximum value of the investment. This way, the sponsor’s approach can be more diversified at an early stage and have more information to make the right decision when the time comes.”
McGinnis also notes how the extraordinary volumes witnessed in the industry means there are various factors which can impact a sponsor’s ability to get a deal done: “It’s important to set expectations early on to avoid disappointment at a later stage. Given the number of SPAC deals going through the industry, most sponsors cannot expect to be at the front of the line. The market will drive their timeliness and attractiveness.”
“As long as interest rates remain low and companies can create financial arbitrage on a deal then the market for SPACs is going to be strong. We are also noticing teams of advisors at some of the major CPA firms starting to favour these as models which could be another indicator as to why this has become an attractive business opportunity.”
The recent regulatory review of SPACs by the SEC could change the vehicle’s trajectory, to some degree. These changes impact the accounting policy for the way warrants are treated, which means companies need to consider amending previously-filed audited and unaudited financial statements. McGinnis highlights: “It ultimately means companies may have to go back and restate their previously issued financial statements and this is a huge headache.
“Surprising changes like these can be a challenge for SPAC sponsors. Such reviews turn standard processes on their head which could make firms worry what other regulatory shocks could be around the corner, especially given the market is becoming more attractive.”
The unintended consequence of the regulatory rehaul, however, has been a spirit of camaraderie in the industry. McGinnis observes: “It’s exciting to see law firms getting together to come up with a solution to this, as opposed to competing against each other. Through our experience collaborating with other third-party advisors and sponsors, we know this helps to create a more seamless process and increase deal success. Every player is affected by this and it is in everyone’s interest to find a way to handle it.”
Zac McGinnis, Managing Director, Riveron
Zac McGinnis has 20 years of global experience in accounting advisory and audit roles, including capital raising assistance, SPAC mergers, carve-out and pro forma financial statements, business combination and divestiture matters, fresh start accounting and reporting, IPO readiness, GAAP change and IFRS conversions, and audit assistance. Zac has served clients in a variety of industries, focused primarily in energy and including multinational publicly traded companies, private-equity portfolio companies, and privately-held institutions. Zac is based in Houston and has spent the majority of his career in Houston, Tokyo, and Amsterdam.