Publications

- July 1, 2021: Vol. 8, Number 7

SPAC attack: Will the fundraising vehicle rocket to the stratosphere, or crash to earth?

by Loretta Clodfelter

What’s so special about special purpose acquisition companies, or SPACs? That’s a question on the minds of many, as the blank-check fundraising vehicles recently have risen to prominence and domination.

The SPAC offers an alternative to the traditional initial public offering process. First, the entity, which operates as an empty shell, raises a pot of capital by selling public shares to investors. Then it finds a private company to acquire and uses the pot of money to take an equity stake in that company — this is the “de-SPAC” transaction. By absorbing the private company into the public SPAC structure, the private company becomes a public company and receives an infusion of capital.

There are nuances to the process, of course. Typically, SPACs offer shares at $10 each, along with a warrant that gives the right to purchase additional shares at a later date. Once a SPAC begins trading, its share price will reflect investors’ expectation of what type of target company and deal might be negotiated. And if any of its shareholders are unhappy with the transaction, they also have the right to redeem their shares. SPACs generally must make their acquisition within two years or return the pot of money to investors. And many SPAC deals are arranged beside a private investment in public equity, or PIPE, transaction, which raises additional capital from institutional players.

RIDING A ROCKET

Investors have been putting a lot of money into these blank-check vehicles. SPAC activity surged in second half 2020 and accounted for half of all IPOs in the year, according to FactSet.

And the pace of SPAC launches in 2021 is already outstripping 2020 activity. SPAC fundraising volume in the first five months of 2021 has exceeded that of all 2020 (see chart). SPACInsider tracked 248 SPAC IPOs in 2020, which raised more than $83 billion. Year-to-date through May 28, there have been 330 SPAC IPOs raising nearly $105 billion.

Why would a target company choose to be acquired by a SPAC rather than have an IPO? Nick Whitehead, senior manager at ZEDRA, identifies three benefits of the SPAC structure: more access to capital, as the structure can be extended to companies who might not be a reasonable IPO candidate; experienced management, as SPACs will come with an experienced management board; and speed of completion, as SPACs can close in a faster timeframe than a traditional IPO.

And because SPACs hinge upon a merger transaction, they involve a different type of financial disclosure and scrutiny for a target company than a traditional public offering. (Simplistically, in the case of an IPO, a company can only provide backward-looking results, whereas with a merger negotiation, the target company can be valued based on future growth projections under the safe harbor for forward-looking statements.)

Consider a startup such as WeWork Cos. The firm notoriously scrubbed a planned IPO in 2019 after facing intense scrutiny from potential investors. But, after some high-profile leadership changes, a year of pandemic and a strategic transformation, the firm announced plans in March 2021 to go public via SPAC transaction with BowX Acquisition Corp., a blank-check company formed by the management of Bow Capital.

The deal, set to close in the third quarter, valued WeWork at $9 billion and provided $1.3 billion of cash for the flexible office space company. BowX Acquisition Corp. offered $483 million of cash in trust (assuming no redemptions). In addition, the deal included an $800 million private placement led by Insight Partners, funds managed by Starwood Capital Group, Fidelity Management & Research Co., Centaurus Capital, and funds and accounts managed by BlackRock.

Starwood has been an active participant in the PIPE market. The firm also backed a SPAC organized by real estate venture capital firm Fifth Wall to bring smart-home technology firm SmartRent public. SmartRent merged with Fifth Wall Acquisition Corp. I, a blank- check company sponsored by an affiliate of Fifth Wall, in a deal that valued the proptech firm at $2.2 billion. The deal included a $155 million PIPE anchored by Starwood Capital Group, Lennar Corp., Invitation Homes, Koch Real Estate Investments, Baron Capital Group, D1 Capital Partners, Long Pond Capital and Conversant Capital.

In addition to the venture capital firms, such as Bow Capital and Fifth Wall, that have been rolling out SPAC offerings, traditional real estate firms have also been entering the market. Massive mall landlord Simon Property Group launched a SPAC in February. Simon Property Group Acquisition Holdings sold 30 million shares at $10 per share, raising $300 million to invest in “innovative businesses with the potential to disrupt various aspects of the retail, hospitality, entertainment and real estate industries and make a transformative impact on in-person and/or online experiences,” according to a filing with the Securities and Exchange Commission.

REGULATORS, MOUNT UP

The surge of activity in the SPAC market has attracted the attention, and scrutiny, of regulators, amid concerns retail investors do not properly understand the structure’s risks. It is possible the SPAC boom has made it too easy for companies without any revenue to go public with excessively rosy projections of future growth — setting up retail investors to lose money in the process.

John Coates, acting director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission, made a public statement in April regarding SPACs, IPOs and liability risk under securities laws. Coates noted, “Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of special purpose acquisition companies, or SPACs. Shareholder advocates — as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves — are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public. With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.”

The SEC appears to be moving in a direction to push greater disclosure requirements for both the SPAC IPO and the de-SPAC merger transaction. In his April public statement, Coates asked, “Where do we go from here? First, and most directly, all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Simply put, any such asserted difference seems uncertain at best.”

If the SEC changes regulations to erase the perceived differences between SPACs
and traditional IPOs, it may let some of the air out of the SPAC bubble.

BOOM OR BUST

SPAC activity has reached heretofore unseen levels, amid a broader-based equity boom. And the real estate investment industry has not ignored the potential, as venture capitalists have used SPACs to usher proptech unicorns into the public markets, attracting considerable private-equity investments, as well, from large institutional players. With the hype, though, has come increased scrutiny from regulators.

This raises the question: Have we reached peak SPAC? It certainly is possible, but the blank-check vehicles raising capital now will have 24 months to find a target and make a deal. It remains to be seen how it will play out.

Loretta Clodfelter is senior editor of Institutional Real Estate Americas.

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