February 9, 2020
Highlights of the SPAC Conference 2020
The SPAC Conference, held in New York on Feb. 6 this year, is the largest event of the year covering the SPAC ecosystem, hosting the largest gathering of investors, financials professionals, bankers, legal experts, and management teams in the business. The first SPAC conference was held in 2008, but this year’s conference was by far the most attended one. This clearly reflects the enormous achievement of the SPAC community to date, as SPAC became a mainstream mechanism to bring late growth companies to the public market.
SPAC by the Numbers – SPAC Research’ Ben Kwasnick did an excellent job walking the audience through the statistics of SPACs. 27% of the total IPOs in 2019 were closed via SPAC process, in comparison to the 19% in 2018, or the 17% prior to that. SPACs are slowly replacing IPOs due to advantages related to certainty of pricing, speed of the process to IPO, flexibility of the financial deal, ability to disclose financial projections, and the option of getting cash at closing for the target company. In 2019, 59 SPACs raised $13.6B, the largest year for SPAC issuance. 97 active SPACs were sitting on $22B cash in the trusts at the end of 2019.
TMT and consumer SPACs remained the most popular in 2019, with $2.7B raised for each of the two segments. Cannabis SPACs are on the rise with $1B raise, and energy SPACs are falling out of favor with $0.8B.
Cantor Fizgerald underwrote the most SPACs for the second year in a row (14 deals, $3.6B). Bulge bracket remained active (Credit Suisse, Deutsche Bank, Citigroup, Goldman Sachs), and new mid-tier banks emerged (B. Riley, Nomura, Odeon). Ellenoff Grossman & Schole led all law firms for the second year, while six firms worked on deals that raised over $2B.
Regarding the returns for investors from IPO to deal closing, the larger SPACs, at over $400M each, produced 12% annualized returns, compared to the 6-7% for SPACs between $100M to $400M. The warrant coverage and SPACs trading above cash-in-trust (about 22% of all deals) are the main drivers of returns. Since the warrant coverage was reduced from 1 warrant to 0.25 warrant per unit during the last year, the implied yield on SPAC common equity has fallen.
The SPAC financial instrument has a threshold for the enterprise value (EV) of the target for a successful start in the public market. Stock price after combination correlates strongly with the public shareholder redemption. Most deals with poor stock performance have very low public participation. Underperformance is concentrated in the deals that sold <$100M equity via the trust, the private investment in public equity (PIPE), the forward purchase agreements (FPAs), etc.
Technology SPAC Full Lifecycle Execution Using the Private-to-Public Equity (PPE) Methodology – Avi Katz, founder of GigCapital Global, walked the audience through the story of a pure technology-oriented SPAC team of 15 entrepreneurs and executives, who are deploying the full cycle process coined as Private-to-Public-Equity (PPE) business to the IPO of late growth stage TMT companies.
TMT sector, the exclusive focus of the GigCapital team, followed the trend of SPACs, growing from 5% in 2015 to more than 12% in 2019. Technology market exhibits a paradigm shift every 20-25 years, creating a discontinuity event and financial opportunities with major impact on the entire ecosystem, including the suppliers and the distribution channels.
By 2020, the emerging 3rd historical IT Technology Platform, driven by the Digital Transformation revolution which has been fueled by Cloud, Payments, Social Business, and Mobility, drove more than 40% of this industry’s revenue. The major implications of the 3rd Platform on the business are mainly on shifting the business models and focus:
- From Hardware to Software;
- From Premise-centric to Cloud-centric deployment;
- From Systems to Services;
- From IT Agility to Business Agility;
- From Information to Innovation; and
- From event purchase order to subscription reoccurring revenue.
The evolution into the 4th Platform will dominate the business and revenues by or before 2025 and will be led by the Digital Transformation becoming the enabler to all the legacy sustainable industries. As such, customer demand will drive innovative and efficient solutions in all those verticals. The Digital Transformation impacts all industries:
- Global Media and Telecom: 16% CAGR from 2015 to 2020;
- Internet of Things: 57 times growth between 2009 to 2020;
- E-Commerce and Retail: 17% CAGR from 2015 to 2023;
- Data Management Solutions: 9% CAGR from 2016 to 2019;
- Global spend on Digital Advertising: CAGR of 45% in 2019 vs 3% in 2001.
Few TMT numbers for the 2019 blockbuster year:
- Out of the record year of the total US Equity Capital Market of $257B, TMT represented 36%, or $92B, and a CAGR of 38%, with the TMT IPO asset increasing 21%.
- US late stage Private Companies Raise increased 16% YoY to about $45B for a total of 800 deals.
The significant increase in the late stage, sub-unicorn private companies’ valuation, with the continuous increase in valuation of the desirable standard IPOs valuation to over $1B, are the primary reasons for the unprecedented growth of the TMT SPAC issuance over the last year and as we move into 2020 and beyond.
The above mentioned technology trends were the reason for the launch of GigCapital in 2017, to offer a path to the public market for the late stage growth companies with high potential, competitive, and exceptionally entrepreneurial management.
Warrant Agreements and Forward Purchase Agreements – Special attention has to be paid in the case of different provisions (ratchets), since the value of warrant changes add liability. Thus, an independent firm that determines the fair value usually has to get involved. Forward Purchase Agreements signal to the market the offset of the redemptions, but the terms have to be carefully considered, since they will add liability to the balance sheet of the company after the combination.
Cayman Islands SPAC Vs. Domestic SPAC – There is fundamentally no difference in the frontend of the process for Cayman Islands or domestic (Delaware) SPACs. But, it takes longer time to open a bank account in the Cayman Islands due to anti-money-laundering rules.
The Islands are small, but they represent the sixth largest offshore banking center, with 212 banks, and 40 of the world’s 50 most successful banks having branches there. The Cayman Islands are not a tax haven, but they are a tax neutral jurisdiction. It is a British territory, and it was King George III that decided the Cayman people should never pay taxes, which is why the residents do not pay income tax, wealth tax or capital gains tax. Thus, a SPAC incorporated in Cayman Islands has tax advantages compared to a domestic SPAC.
But…, if for any reason, the SPAC sponsors decide to domesticate a Cayman Islands SPAC, they will need to pay tax from the working capital, if provisions are not correctly put in place at incorporation.
Direct Listings: Gaining in Legitimacy or Just a Fashionable Trend? – John Tuttle, Vice Chairman & Chief Commercial Officer at NYSE, clarified some of the aspects of the direct listing.
The Swedish music streaming company, Spotify, went public on the New York Stock Exchange in April 2018. Instead of an initial public offering, Spotify opted for a direct listing, meaning rather than issue new shares, the company started trading by letting existing shareholders sell their shares directly on the public market. It also meant Spotify didn’t raise a cent, and all the proceeds went directly to the selling shareholders, such as early investors and employees. There is no underwriter, nor stabilization agent, in the direct listing process.
Direct listing works for companies that do not need capital at the IPO moment and that can generate enough float to pass listing conditions. The SPAC process is quite the polar opposite from direct listing: most companies are able to get cash at the moment of combination, but they are quite poor in regards to the float. NYSE had one direct listing IPO in 2018 and one in 2019, and they project three to five direct listing IPOs in 2020.
Bottom line, the private to public transition has to be chosen and tailored as a function of what is best for a specific company.
How SPACs are Competing with Strategic Buyers in the Cut-throat M&A Market – The most exciting panel of the day was elegantly moderated by Lou Taubman, a Partner at HTFL, The panel included three SPAC sponsors, James Graf, CEO of Graf Industrial Corp., George Schultze, CEO of Schultze SPAC, Christopher Bradley, CFO of Haymaker Acquisition Corp., and Carlos Alvarez, Managing Director at UBS.
The SPAC companies compete for targets with PEs only when there is not enough understanding of the advantages and disadvantages of the SPAC vs. the sale or standard IPO of the company. While the SPAC sponsors have to explain and guide the targets. The market is much more educated today compared to few years back. As one of the panelists smartly said, “SPAC is like a game of chess with a timer”, unlike the standard IPO. Many large PEs started their own SPAC practices in house, proving the complementarity of the financial mechanisms.
All Sponsors agreed that the SPAC needs creative minds in the extended team that understand the advantages and disadvantages of this financial mechanism. Most importantly, the sponsors have to interact smoothly with the target company executive team and the legal/underwriters/advisors team. The SPAC uniquely offers the opportunity for the buyer and the seller to be on the same side of the negotiation paradigm, as the public market will lay bare any valuation the team will put out.
Sponsors put their brand behind the target company to support the process, while the target company carries the responsibility of performing in the public market beyond combination, as in the standard IPO process.