SPAC launches leap, but institutions are wary

Updated with correction

The huge increase in the number of SPAC launches in 2020 continues apace, but so far, most institutional investors still are on the sidelines when it comes to investing directly in them.

There were 248 special purpose acquisition company offerings in 2020 with gross proceeds of $83 billion, four times the volume of SPAC transactions in 2019 and an increase in gross proceeds of 510% from $13.6 billion that year, according to data from SPAC tracker SPACInsider.com.

As of Jan. 15, 53 SPAC offerings had been launched in 2021 with gross proceeds of $14.6 billion, according to the website.

Sources stressed that current market conditions are very favorable for successful fundraising via SPACs.

SPACS or so-called blank-check companies have no commercial operations and are formed for the purpose of raising money through an initial public offering in order to acquire a private company, which will become publicly traded after merging into the SPAC.

"The landscape is very beneficial for SPACs given that equity valuations are at all-time (high) levels," said George Antonopoulos, managing partner and portfolio manager at Hudson Bay Capital Management LP, New York, a multistrategy hedge fund firm that has been investing in SPACs for more than 10 years.

"Capital markets are robust, merger and acquisition activity is high, and there is a lot of dislocation in traditional sectors from the impact of COVID-19" resulting in attractive target companies for SPAC sponsors, Mr. Antonopoulos said.

Hudson Bay Capital manages $8 billion.

Attorneys are busy this year structuring SPAC deals, said attorney Keith J. Billotti, co-head of capital markets and corporate securities at Seward & Kissel LLP, New York.

Mr. Billotti said part of the attraction of SPACs for investors is that there are two phases in the process of taking a private company public resulting in two potential investment opportunities.

In the first phase, SPAC sponsors have up to two years to find a company to merge into the SPAC vehicle, he said. The investment is risk-free because the value of units held by investors remain at $10. First-phase investors also get warrants which give them the right to buy more shares within five years. Once the SPAC sponsor chooses the company to take public via the SPAC, capital is returned at par.

Mr. Billotti said few institutions invest in the blank-check company phase because "they want to know what company they actually will invest in." Many asset owners wait to invest until the sponsor identifies the target company, he added.

It's at this decision point — whether to invest in the new publicly traded company — that asset owners tend to take action either by buying the new stock on the public market or through a Private Investment in a Public Equity Issuance, or so-called PIPE, Mr. Billotti said.

PIPE financing is essential because it provides the liquidity needed to return cash to investors in the initial public offering and PIPE investors receive company shares when the company begins trading.

Mr. Billotti said a growing number of large institutional investors are joining hedge fund and traditional managers in investing in SPACs via PIPE investments.

Asset owners investing in SPACs through PIPE transactions and/or in the first IPO phase include the C$118 billion ($93 billion) Alberta Investment Management Corp., Edmonton, Canada; the $400 billion GIC Private Ltd., Singapore; the C$94 billion Healthcare of Ontario Pension Plan; Toronto; the C$205 billion Ontario Teachers' Pension Plan, Toronto; and the $162.7 billion Teacher Retirement System of Texas, Austin. Allocations are according to regulatory filings, news releases from SPAC managers and confirmations from pension systems.

Marissa Lum Wen-Kar, a GIC spokeswoman, declined to comment in an email and spokesmen for OTPP and HOOPP did not respond to requests for information.

AIMCo has been investing in SPACs since 2014 "to diversify equity portfolios and source deal flow from key sponsors and management teams," Justin Lord, director, public equities, said in an email.

AIMCo invests directly in SPACs in both primary and secondary markets, as well as through PIPEs around the closing of qualifying transactions, he said.

Mr. Lord said AIMCo is focused on the quality of the sponsors creating SPACs and "their ability to source a compelling and differentiated stream of deal flow as well as manage organizational/operational change in a company."

SPACs have added both alpha and diversification to AIMCo's portfolio because the structure "allows for upside convexity associated with a transaction or IPO, while taking little risk during the deal-seeking portion of the process. We have used deal flow in the space to establish positions through the qualifying transactions in a wide array of companies in high-growth and value-oriented investment opportunities," Mr. Lord said.

Mr. Lord said AIMCo's investment in SPACs is "a relatively small part" of the system's C$45.5 billion public equity portfolio.

Spokesman Denes Nemeth said the amount AIMCo has invested in SPACS is not available.

Texas Teachers also is "actively reviewing opportunities in the SPAC ecosystem as part of our opportunistic portfolio," said Ashley Baum, director-special opportunities.

The TRS investment team is "carefully deploying capital with high-quality SPAC sponsors through participating in founder shares, initial offerings and PIPE offerings. We believe that TRS is well-placed to bring institutional support through the lifecycle of a SPAC," Ms. Baum said, adding "while we share the general concern around the explosion of offerings, we believe certain highly selective situations are attractive."

TRS spokesman Robert Maxwell declined to provide the amount the system has invested in SPACs.

Industry observers said the attractiveness of SPACs now is likely due to the generally higher quality and better reputation of SPAC sponsors, especially money managers.

"There were a lot of negative associations with earlier SPACs. They were considered dodgy because their deals didn't always go through or there were other problems. SPACs often were vehicles designed to make money for the promoter, not the investor, and then they were forgotten for 15 years," said Andrew Brown, senior director and head of private equity research, Willis Towers Watson PLC, London.

"There still is a bit of a negative connotation for SPACs, but for the most part, the SPACs today are being created by very reputable sponsors," he said, noting that many money managers well known to institutional investors introduced new SPACs last year and are launching more this year.

Money managers that launched SPACs in 2020 and 2021 include Apollo Global Management Inc., Blackstone Group Inc., Cerberus Capital Management LP, H.I.G. Capital LLC, Mudrick Capital Management LP, Neuberger Berman Group LLC, Starboard Value LP, Thoma Bravo LP and TPG.

A number of SPAC sponsors are private equity managers likely taking advantage of the easier exit that taking portfolio companies public through a SPAC affords, compared to the often complicated and lengthy process required of a traditional IPO, Mr. Brown said.

"SPACs reflect the most efficient way for private companies to go public in today's unusual time of great turmoil coupled with easy money. The normal S-1 registration process for (an) IPO is otherwise too painfully slow these days, so SPACs can fill the gap," said a consultant who asked not to be named.

Despite strong fundraising by firms like Thoma Bravo, which announced Jan. 20 that it raised $1 billion for its new Thoma Bravo Advantage SPAC, sources said there hasn't been a stampede seeking to invest directly in SPACs at either stage of the investment process.

Alternatives consultant Cliffwater LLC has advised its clients to get their exposure to SPACs through multistrategy or event-driven hedge funds, said William A. Dornbrook, a vice president and private equity specialist for the Marina del Rey, Calif.-based firm.

Mr. Dornbrook noted that the firm's investors "aren't interested in investing directly in a private equity firm-sponsored SPAC," but are interested in "the arbitrage trade many hedge fund managers are employing, investing in SPACs prior to the merger of a target company into the SPAC."

He said when the merger happens, the stock price often rises and hedge funds generally sell at a profit.