SPACs – Hard-to-Match Potential Gains

In a world where major equities are largely supported with central banks’ newly created money, and government bonds might cost investors something to hold, SPACs are becoming a very profitable way to put capital to work.

Special Purpose Acquisition Companies, or SPACs, are freshly incorporated companies that are listed on a major equity market, like the NASDAQ or NYSE, but without a business.

These companies generally have a good acquisition strategy, and an experienced board that has decades of professional experience. Both the company’s capital and management are in-place when the company is listed on an exchange, and then floated with an Initial Public Offering (IPO).

Clearly, the board of the SPAC and its acquisition strategy are important factors that will help convince institutional investors to back the company with substantial amounts of capital on the first day of the SPAC’s IPO. These institutional investors are generally pension funds, large family offices and sovereign wealth funds from developed economies like the US and EU as well as from other countries.

A US listed SPAC has to provide own capital when issuing its IPO, in addition to institutional IPO investors. This capital is provided by the so-called SPAC sponsors, being the initiators of a SPAC. The sponsor capital provided on the IPO in form of a private placement is typically 5 – 8% of the planned proceeds from the IPO, depending on the size of the IPO. This sponsors’ capital contribution is considered as “skin-in-the-game”.

SPAC Sponsor Profiles: What Typical Sponsors Look Like

SPAC sponsors tend to comprise one of three groups, depending on their motivations and interests:

ONE – Business executives with deep experience who want to develop project ideas that are larger than the funding they possess or would be better served by a larger group of investors.

TWO – A company that wants to access a substantial amount of capital for projects.

THREE – PE funds or individual investors who want to sponsor a SPAC, and benefit from its later acquisitions, and from the extraordinary gains on the day of the IPO and later. These types of sponsors may often act as co-sponsors.

Company owners, groups of owners, or any entity that controls valuable property that is worth tens of millions of USD may decide that a SPAC is a better way to reach the public markets. The SPAC process gives a company owner more control over who buys their property, and how much of an interest they can maintain or sell.

All of these owners or investors would act as the sponsors of a SPAC, and put the required sponsor capital into place. These sponsors also may look for co-sponsors if extra funding is needed to begin the SPAC.

A company can raise significant capital with a SPAC to further existing projects, combining a private company with the SPAC. In addition to the funding, the SPAC allows greater flexibility during the acquisition process than a traditional IPO, which is centered on taking a single private company into the public markets.

When compared to a traditional IPO, SPACs are not only faster, but also offer cost benefits as well. Traditional IPOs will take a minimum of a year and more to organize and can cost more than ten percent of the IPO’s projected proceeds. By comparison, a SPAC can be ready for its IPO in three to five months, and the costs are remarkably lower.

A PE fund or private investor will be motivated by creating returns and is not likely to have his own project or novel idea he needs funding to support it. By participating in the pre-IPO level of a SPAC, these funds can create tremendous returns, and also are likely to provide most or all of the initial capital required to take the SPAC to the IPO stage, including the sponsor capital.

When a private investor or PE fund participates in a SPAC’s formation, they will have a seat on the board of directors, which gives them an added level of control in the process of defining specific acquisition targets.

The exit strategy for a pre-IPO sponsor of a SPAC is also very clearly defined, which is not the case with most direct investments in private companies. All of these advantages help institutional investors and private investors to gain from early-stage participation in a SPAC.

SPAC Sponsors: The Potential for Gains and Returns

As outlined above, the flexibility in the SPAC architecture is subsequent. The information compiled below is based on what SPAC Consultants offers its clients when setting up a SPAC and is generally better to what other consultancies will offer. Comparative metrics are in brackets.

SPAC Sponsors: Receiving Founders Shares

The sponsors of a SPAC typically receive the vast majority of a SPAC’s founder shares in return for sponsoring the company in its pre-IPO stage. SPAC founders (those who sponsored a SPAC as well as those who did not sponsor a SPAC) hold, after IPO, a total of shares worth 25% of the IPO proceeds, in addition to the proceeds.

Founder Shares – How do They Work?

All founder shares will be transformed into (exchanged for) listed common shares on the day of the IPO at a rate of ¼ of the proceeds of the IPO.

Example:

A SPAC plans to raise USD200 million from institutional investors.

During its roadshow, institutional investors have been impressed by the SPAC’s board and ideas and have decided to commit to funding the company through its IPO. At this point, it is time to list the SPAC as a public company and move forward with the IPO.

It is common for a SPAC to use a share price of USD10. On the day of the IPO, 20,000,000 common shares in the SPAC will be priced at $10 and are then offered to and bought by institutional investors, raising USD200 million.

SPAC sponsors will receive one Unit comprising one share and one warrant for each USD 10 invested. 

In addition, as a so-called sweetener, sponsors also receive pre-IPO SPAC founder shares, for which listed shares will be issued on the day of IPO, through a private placement.

SPAC Sponsors and Warrants

The standard execution price of a SPAC warrant is USD$11.50. To have value, the shares on the exchange must be trading above this level at the time when the warrants are executed. While the warrants can be executed if the share price is below this level, the warrant is not likely to have as much value to the holder.

There is flexibility on the time frame that warrants can be redeemed. Some arrangements state that a warrant can be redeemed no earlier than 30 days after a successful acquisition by the SPAC, while others state the warrants can be executed within 12 months of the IPO, or after a successful acquisition.

The price of SPAC shares can appreciate significantly after its successful acquisition, especially if it is able to raise awareness of its goals via a well-designed PR campaign. Prices can move up to USD$15 and more, if the board is able to show the markets a solid plan and business is growing as expected. SPAC warrants must be executed if the share price reaches USD 18.00.

When the SPAC’s shares are trading above the warrants’ USD$11.50 execution price, the warrants gain a substantial amount of value. For example, if the shares rise to a level of USD$16, each share resulting from an executed warrant would yield a profit of USD$4.50, being sponsors’ additional gains.

If a warrant holder doesn’t have the funds in place to make the transaction (the warrant execution price needs to be paid in full), SPAC Consultants may be able to put a short-term bridge loan into place with the underwriting bank to facilitate the transaction.

In addition to being executed to realize a profit, warrants are also marketable in the secondary market in their own right. Warrants can also be sold to other shareholders of a SPAC at any time, as institutional investors could be interested in acquiring sponsor warrants at a discount to their value execution value.

It is important to remember that a successful SPAC will have a board that knows how to make valuable acquisitions. If the board should fail to acquire valuable private companies, the shares in the company would likely fall in value, and the warrants would be worthless.

Rising Share Prices Benefit SPAC Sponsors

After the IPO, a SPAC’s public shares tend to trade at the level they were issued, and the volume generally remains low. The shares tend to rise once the SPAC is in an advanced stage of negotiations with a target company, and the board communicates the progress via a PR program to the public.

Good public communications will drive investors to the SPAC, and the share prices are likely to rise as a result of the buying interest. As a valuable deal draws closer, the share price is typically going to reflect the progress in the deal making process.

At the point when a successful acquisition takes place, and the company goes through the De-SPACing transaction, the amount of information that the general public has about the company will rise substantially.

Banks, brokers, investment funds and other larger market participants use their own communication channels to inform clients about the deal, and any new assets that are in the public markets. Widespread positive publicity will create even more demand for the shares, and the price can increase quickly.

SPAC Consultants Helps Sponsors Create Value

SPAC sponsorship can create great returns, but professionals are needed to make the SPAC process successful – from start to De-SPACing. We are a specialist SPAC consultancy and SPAC advisors, with profound of experience in the SPAC sector. We are here to help and create value for everyone in the SPAC process.

With our resilient connections in the investment banking industry and we can unlock value for sponsors that other consultants may not understand. Please contact us for more information about how a SPAC may be able to help your company go public, or how sponsoring a SPAC could create compelling returns.