Four Key Takeaways from The SPAC Conference 2021
Amidst the capital markets boom of special purpose acquisition companies (SPACs), Riveron’s team participated in The SPAC Conference 2021. The event convened sponsors, investors, target companies, and partners abuzz with talks of current challenges, innovative ideas, and projects. Ultimately, there are no signs of slowdown for this popular alternate method for accessing the public capital markets. Here are four key takeaways from the conference.
SPACs have gained popularity and are a vehicle with staying power.
Although SPACs have been around for decades, the past year and first quarter of 2021 have become a remarkable time for this capital markets vehicle. As this path has become increasingly prevalent, today’s SPAC sponsors rarely need to explain to target companies what a SPAC is or how it works. Even with a slight slowdown after the presidential election, conference participants noted that the market surged with activity in 2021 with nearly 350 SPAC IPOs, many occurring in the first quarter.
The surge of popularity of SPACs was initially paved by the pandemic which, near the end of the first quarter of 2020, temporarily froze the IPO window. Low interest rates, continuous volatility of the traditional IPO market, and investors’ appetites for new growth opportunities further fueled popularity of SPACs throughout the early Q2 2021. In the second quarter of this year, the SPAC market shifted dramatically, with many SPACs trading near or below the value of the cash value in their trust accounts. The shift happened in part due to the market being oversaturated with more than 400 already public SPACs searching for targets to find deals. (Related article: the “SPAC clock” is a common challenge in deal success.) The situation was further exacerbated by a statement released in April by the Securities and Exchange Commission (SEC) regarding warrant accounting, causing many active SPACs to revisit the accounting for warrants, which sometimes delayed deal activity for about a month.
Despite the slowdown of SPAC transaction activity due to regulatory intervention and other factors, the fundamentals of the SPAC market remain strong. Throughout the conference, participants noted on multiple occasions that—although SPAC activity going forward may not be able to measure up to the level of activity observed during 2020 and first quarter of 2021—the SPAC product has become vital and central to the capital markets. SPACs have gained trust and credibility among investors, and the vehicle is here to stay.
Many parties are at the SPAC transaction table, so incentives must be carefully navigated.
A conference session on SPAC incentive structures session highlighted that the SEC recently outlined three areas of concern related to incentives in a SPAC transaction: first, investors may be investing in a product that they do not fully understand; second, sponsors may face risk by rushing to select the wrong deal as the “SPAC clock” runs out; and last, assets might be overbid due to the increased levels of deployed capital.
In SPAC scenarios, three major players might be faced with misaligned incentives, including: (1) SPAC sponsors, with a real incentive to get the deal done; (2) company management, with the incentive to provide forecasts and other disclosures that might be unsupportable or unable to be validated adequately; and (3) underwriters, facing an incentive to push through the deal so that significant compensation is not deferred.
When discussing incentive structures, conference panelists emphasized the importance of establishing and maintaining market-based solutions that help alleviate the misalignment of incentives, and solutions should provide adequate reward to the parties involved in SPAC transactions. Discussion also underscored the importance of appropriate compensation programs to attract and retain talent of a target in the post-merger period.
For investors to understand SPAC deals, disclosures are paramount.
A panel of experts, including Riveron’s Zac McGinnis, highlighted the importance of clear disclosures when investing in a SPAC or de-SPAC company. Retail investors especially need to understand the economics of the securities that could potentially dilute the value of public stock after a de-SPAC transaction. Expert discussion centered on a few key themes:
The importance of PIPE for raising capital
Private investment in public equity (PIPE) entails selling public company shares to select private investor or group of investors, and it has become significantly more important in helping SPACs raise additional capital to close a transaction with a target company. Raising PIPE-related commitment is critical to success, and this factor was frequently discussed as the driver for turning around many previously unsuccessful transactions, particularly when the cost of acquiring a target company is greater than the available funding in a trust account of a SPAC.
An increased focus on deal terms simplicity
Legal and deal complexity concerns were expressed consistently during the conference, even to the point where several practicing attorneys had difficulty understanding and articulating the purpose of various historically accepted and carried-forward agreements, such as the warrant agreement that is currently being re-examined in some cases given the SEC’s statement issued in April, and related interpretations. Overall, success depends on a shift to deal term simplicity to facilitate smoother transaction timing and to make it easier to avoid commonly misunderstood issues.
Emerging perspectives on warrant accounting and deal impacts
Regarding the SEC’s April 2021 statement on warrant accounting, rule interpretation guidance is emerging as a hot topic for investors and their advisory teams. Contributing to the various perspectives of the panel, Riveron experts have observed a recent pattern for SPAC teams deciding to get to market quickly and conclude on liability treatment; a handful of these teams have decided to update their warrant agreement for equity classification. The economic or deal ramifications will be revealed over time when the de-SPAC process occurs for those sponsors that have elected liability classification.
The operational requirements of being public are real, and companies must be appropriately equipped with the right processes, technology, and capabilities.
Most SPAC target companies lack the capabilities and infrastructure necessary to operate effectively as a publicly traded company. Establishing a base level of infrastructure and capabilities will help a target company differentiate itself to a SPAC and position the organization to scale effectively, minimizing incremental sales, general, and administrative (SG&A) costs as it grows. Priorities for establishing public company readiness vary by organization, but for many small and medium-sized organizations, the following areas often require the most focus:
- Implementing an enterprise resource planning (ERP) system that is public company ready, transitioning from a limiting “QuickBooks” type environment.
- Formalizing core accounting processes to be able to close the books efficiently and report results externally in a timely fashion.
- Enhancing the ability to plan and measure the performance of the business by establishing basic key performance indicators (KPIs) and metrics, planning processes, and management reporting methods.
- Upskilling existing team members or hiring new team members that have the requisite capability to meet public company requirements.