Private Equity and Venture Capital Firms Expected To Drive SPAC Growth this Year

The private equity (“PE”) and venture capital (“VC”) industries are expected to continue driving the special purpose acquisition company (“SPAC”) IPO market this year, with the prevailing belief that SPAC capital is a viable alternative for their deal-making activities. According to recent data from Pitchbook, in 2021 at least 20 private equity-backed companies can go public via a SPAC after a number of large PE titans including Apollo Global Management, TPG Capital and more collectively raised around $73 billion in SPAC capital last year.

SPACs, also known as blank check companies, have been embraced by PE and VC firms as a quick way to raise capital in an IPO from a new class of retail investors with generous PE-like economics. Proceeds from the IPO are placed in a trust account and used to buy a business via a reverse merger, generally within two years. If the SPAC shareholders do not approve of the proposed merger or the SPAC term expires, then the IPO capital must be returned to investors. In 2020, the SPAC IPO market benefited from the robust activity in the stock markets with exchanges reaching all-time highs.

EisnerAmper spoke with executives who shared their views on why PE- and VC-backed SPACs will continue to gain steam this year and the drivers behind going public without pursuing the traditional IPO route.

First and foremost, SPACs have been an easy and quick way to raise significant capital from a wide range of investors due to involvement from bulge-bracket banks without in-person roadshows, which have been virtually impossible during the pandemic. In addition, they have also gained steam due to pricing inefficiencies, are more easily redeemable, and investors are guaranteed to get their money back if they do not approve the merger in a two-year timeframe. However, they must be cognizant of both stock market swings that might impact them and the market sectors that are issuing them to see which are poised to be most lucrative.

Science Inc., a Santa Monica, California-based VC firm listed their first SPAC, Science Strategic Acquisition Corp. Alpha (SSACA), on the Nasdaq Capital Market. SSACA will focus its search for a target business operating in the direct-to-consumer brands, direct-to-consumer-services and mobile and social entertainment sectors.

Mike Jones, the co-founder & managing director of Science Inc., said the firm decided to list a SPAC as a way for VCs to enter the public markets. He also wanted to bring Science Inc.'s early-stage tactics to late-stage companies as true value-added board investors. SSACA priced its offering at $270 million on Monday, January 25 and closed it at $310.5 million on Thursday, January 29 with a full exercise of underwriter’s over-allotment option.

“I generally believe the best value in VC investing is in a barbell shape, either super early stage or super late stage,” he said. “Because we have so much knowledge from our experience as early stage investors, we thought a SPAC vehicle would be the natural route for us as long-time venture capital investors to add value in many ways, providing capital, being a board member and shepherding the company to be ready for public markets.

“For many people like myself that follow a similar career path as investors, the next step for us is to enter into the public route, but VC has not yet stepped deeply into the public markets,” he added. “There is a contingent of VC investors who want to find their way onto public boards and that will continue.”

More generally speaking about the popularity of SPACs amongst PE and VC firms, Ira Miller, CEO, Zone Capital Partners, a California-based M&A Advisory firm, is one executive who said they are expected to continue to raise capital quickly since COVID-19 has prevented in-person roadshows, hence eliminating competition from the traditional IPO market.

“If you look recently at the last two IPO markets, there are built-in price inefficiencies for early stage investors,” he said. “If you look at VC and PE investing in the traditional IPO market, Airbnb popped up to a $100 billion valuation which was 113% higher than where VC and PE firms had invested.

“Therefore, SPACs are more prominent for two main reasons,” he added. “There is no need and it is expensive to do roadshows in the middle of COVID-19 and also due to pricing inefficiencies. In addition, they can go public in a shorter period of time and are redeemable. If the SPAC doesn’t complete, investors get their money back.”

However, it is important that PE and VC-backed companies be mindful of stock market swings and the market sectors they are taking bets on to see which would be most lucrative.

Michael Smith, a partner at law firm Nixon Peabody, said PE- and VC-backed SPACs must take into consideration the capital markets broadly and be mindful of stock market swings, which might impact SPACs.

“The stock markets had a good year in 2020 so SPAC IPOs are riding a wave of stock market appreciation regardless of opportunities that are there so if that market happens to pop, they may downsize or stop IPO process,” he said. “The number one risk is stock market drops this year. SPAC IPOs can get to market quicker than normal IPOs.”

With respect to market sectors, esports and egaming are some of the top sectors where SPACs have been prominent. One of the top SPACs done in egaming has been in DraftKings. It was followed by Luckbox. New York announced in early January they would loosen laws in egaming and, therefore, it is anticipated that other SPACs in the sector will take advantage of the upside.

“SPACs have been a really exciting development for our industry,” said Wayne Kimmel, managing partner, SeventySix Capital, a sports tech venture capital firm in Pennsylvania. “Close to 40 sports and entertainment SPACs have been created in the last year that are either public or about to go public. That gives us as venture capitalists an additional opportunity to create an exit for one of our portfolio companies.”

He added: “Therefore, if one of our portfolio companies becomes a target of a SPAC and then goes through the de-SPACing process to go public, the SPAC’s board and team can add expertise to the new public company. As our portfolio companies grow to be the right size for publically traded companies, having some of these individuals who run these SPACs would be great.”

Other sectors that are poised to benefit from PE and VC-backed SPACs are cybersecurity and fintech companies, as these have become more prominent with a remote workforce. In addition, with COVID-19, biotech and health care SPACs have also been prominent.

Looking ahead for 2021, it does not appear that private equity-backed SPACs will slow down anytime soon and there is expected to be more traction amongst foreign companies partnering with PE firms to IPO via SPACs

“The money is going to go where the growth is given we are still in pandemic and we are in the midst of a change in administration,” Miller said. “PE likes liquidity and when you have a market this hot, money is chasing it. Therefore, PE and VC funds want to originate these issues because they are confident in other issues that have performed across the board like Lyft, and there is a whole transformation in the financial world into SPACs.”

Smith added: “Foreign businesses in China or India, Europe and Canada are looking to IPO by a SPAC listed on the NASDAQ or NYSE so they can partner with an established PE name, well known management and well regarded Wall Street underwriters. As things de-SPAC, we will see more foreign companies merge into U.S. SPACs.”

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