SPAC Dilemma That Is Being Faced By Private Equity Firms
SPAC, also known as Special Purpose Acquisition Company, is a blank check company or a shell corporation that solely exists so that it can acquire other businesses and make them public. Getting your company listed is an extremely lengthy process and the only reason why the SPAC exists is to fasten the cycle and raise capital sooner.
However, the existence of SPAC has always been controversial and many people have had a love-hate relationship with it. This is especially true for private equity firms as their entire job is to manage investments allocate funds. When it comes to SPAC, private equity firms were been the first ones to back the concept — however, these days with the amount of rising concerns that the SPAC brings, they (along with their investors) have been second-guessing their decision. This is perhaps one of the reasons why the hype behind SPACs has died down in the recent years.
Scott Voss, a managing director at HarbourVest Partners, a Boston-based private market investment firm said, “I would love to get the benefit of the economics from the SPAC, if the risk-return profile makes sense for the fund that I invested in, but I think there are cases where that may not be the case.”
When the concept of SPAC recently came to the market, many private equity firms launched their own SPAC as an extension of the on-going services that they provided, but transparency issues, management problems, and fraud alerts all combined created a bad name and reputation for SPAC and the general public began to rethink before investing a SPAC-led stock. The private equity firms that instead just chose to back up an existing SPAC also faced similar issues which led them to be uncertain of their support in SPAC stocks.
“SPACs by design aren’t as transparent as private-equity funds about their investment strategies and that’s why they shouldn’t be inside funds. It’s a transparency issue. As a fiduciary, I have to have transparency so I can do due diligence. If a fund decides to take exposure in a SPAC, we generally don’t find that favorable. The sponsor economics are of secondary importance,” said Stephen Colavito, managing director and chief market strategist of Lakeview Capital Partners, a family office in Atlanta.
However, not many investors and private equity firms share the same thoughts about this. Some believe that SPAC has allowed them to earn more and has created lesser problems due to the kind of alignment it creates.
“SPACs offer many incentives to sponsors, particularly the right to buy 20% of the SPAC stock at a deep discount, which often enables them to profit even if the stock performs poorly. If the fund in which we’re invested sponsors the SPAC, it tightens up alignment between the limited partners and general partner, as all share in the economic benefits of the vehicle,” said Mr. Brendon Parry, a managing director who oversees private investments at TIFF Investment Management, an asset manager for nonprofit organizations. “Who’s sponsoring the SPAC — the firm or the fund — is probably the most important question,” he added.
Either ways, investors are not too happy with SPAC and this in itself may allow for some changes and/or restructuring of SPACs.
