The last several months have seen a significant evolution of the SPAC—or Special Purpose Acquisition Company. SPACs are blank check public vehicles that are formed for the purpose of consummating an acquisition of a to-be-identified business. Some SPACs are focused on specific industries or geographic areas of the world. Others take a more generalist approach.
Not only has deal size increased substantially, with a significant uptick in the number of larger SPACs, but the nature of the SPAC promoter has changed as well. The promoters of many of the current crop of SPACs are extremely well-known names from the buyout and alternative asset management communities, as well as from corporate America.
Deal terms continue to evolve as well. There has been downward pressure on the 20% founder promote in some recent deals, and warrant-exercise prices have trended down and exercise periods have lengthened. At the same time, there has been upward pressure on the percentage of cash placed in trust at closing. As activist investors have begun to turn their attention to SPACs, conversion rights also have evolved.
Since 2003, over 150 SPACs have been completed. As of Feb. 27, 2008, a total of 74 SPACs seeking to raise over $12 billion were in SEC registration. In addition, during February 2008, Nasdaq submitted a proposed rule change to the SEC providing for SPAC-specific listing standards, reflecting Nasdaq's view that blank check vehicles have become a structural part of the M&A landscape.
Increased deal sizes have created more significant return opportunities for SPAC promoters. As a result, many alternative asset managers—from both the hedge and private equity sides of the aisle—have begun to evaluate SPACs as a part of their platform.
SPACs sponsored by existing alternative asset managers raise a number of structural considerations not often faced by other promoters, including the following:
- Potential conflicts of interest must be carefully analyzed. Existing business activities raise both disclosure and, in some cases, consent issues, especially for private equity managers. On the flip side, the SPAC must be structured to mesh with future business activities, including future permanent capital vehicles. These considerations are further complicated to the extent that the promoter wishes to sponsor multiple SPACs.
- There has been a flight to quality management teams by investors. Hedge fund promoters in many cases need to round out the SPAC team, adding team members with acquisition and/or industryspecific experience. Compensation arrangements vary widely in terms of both equity and cash, as well as other retention terms.
- Alternative asset managers often prefer a holding company structure for holding the promote and making their real equity investment. Structure will be dictated by co-investment considerations and who will receive an interest in the promote.
- Given their cash resources, alternative asset managers often wish to make a larger co-investment in the SPAC, and are more amenable to a 10b5-1 purchase component, both of which raise additional structural considerations.
- As a public company, a SPAC is subject to periodic public company reporting. The reporting regimen generally is not as complicated as for an operating company, although there are a few twists. Many alternative asset managers need to build out their financial reporting and/or legal compliance function in order to adequately handle public company compliance for the SPAC. In many cases, this is a significant lead time item.
- Finally, for some alternative asset managers, SPACs raise Investment Company Act considerations, and all managers, registered or not, must be mindful of the Advisers Act.