The rise of the SPAC

Dealmakers leverage SPACs to pursue fintech acquisitions

Blank check companies, otherwise known as special purpose acquisition companies (SPACs), have surged in popularity in 2020 since the route to going public is much faster than the traditional IPO method.

SPACs have emerged in a wide range of industries – from those investing in the electric vehicle market to ones to those with wider breadth that plan to invest in the consumer, fintech or software industries. An example of the latter is one just filed by Gary Cohn, the former director of the National Economic Council and chief economic advisor to President Donald Trump from 2017 to 2018 and former chief operating officer of Goldman Sachs

Cohn and his co-founder, investor Clifton Robbins plan to raise $600 million in their SPAC, Cohn Robbins Holdings Corp, and list on the New York Stock Exchange under the symbol “CRHC.U,” as they seek “attractive trends,” according to an Aug. 25 U.S. Securities and Exchange Commission filing.

SPACs are shell companies that go public and can buy operating companies at a later date in any industry. When companies file an IPO, they also conduct road shows which allow investors to ask questions and conduct due diligence, but SPACs skip that process.

Several of the SPACs that have recently launched are in the fintech sector and have raised large amounts of capital. 

Ribbit LEAP, which was created by Palo Alto, California-based fintech-focused Ribbit Capital, also filed on August 25 plans to acquire a fintech business via a $350 million capital raise. That SPAC is led by CEO and Chairman Meyer Malka, the founder and managing partner of Ribbit Capital, and COO Cynthia McAdam.

According to Renaissance Capital, Ribbit LEAP is not using the traditional founder share structure most SPACs employ. Instead, it is opting for performance-based founder shares that vest in four equal tranches “upon achieving outsized share performance following completion of its business combination.”

Foley Trasimene Acquisition II filed also in August. It is the fourth blank check company started by financial services veteran Bill Foley and it raised $1.5 billion. Foley is chairman of Black Knight (ticker: BKI), Fidelity National Financial (FNF), and Cannae Holdings, and a senior managing director of Trasimene Capital Management.

Another (very) recent fintech SPAC is FTAC Olympus Acquisition (FTOCU), which raised $750 million. It represents the fourth blank check company created by The Bancorp’s management to buy fintech businesses. It does not plan to target fintechs with excessive leverage or speculative business plans. The Bancorp Founder Betsy Cohen will serve as its chairman while Ryan Gilbert, general partner at Propel Venture Partners, will be its CEO.

Through July, over 50 SPAC offerings closed, raising over $21.5 billion, an increase of 145% from the same period in 2019, according to a CNBC article citing Goldman Sachs

For example, in late July, it was revealed that real estate tech company Porch planned to become publicly traded through a merger that valued it at $523 million. That agreement is set to combine Porch with PropTech Acquisition Corp., a SPAC. That Los Angeles-based “blank check” company went public in November in a $172.5 million IPO with the intent of making such a deal, according to GeekWire.

SPACs aren’t just an alternative to IPOs, but essentially they have become a new structure for merger and acquisition activity, said Stuart Michelson, a finance professor at Stetson University in DeLand, Florida. 

“Deals can be negotiated quietly, in private, and more quickly,” he said. “The target firm’s investors retain a stake in the firm and gain liquidity as well.”

With the increase in SPACs, the financial sponsors are receiving a lower promotional stake and warrants have been reduced or eliminated.

“One reason for the increase in SPACs is the rush to market ahead of impending market uncertainty prior to the November election,” Michelson said.

Proskauer, a law firm, reported that 95 SPACs went public between January 2016 and June 2020. Some of the SPACs go on to raise even more capital – 19% of the SPACs disclosed the existence of a forward purchase contract and two-thirds of the SPACs that “completed initial business combinations had raised additional equity financing in the form of a private placement for public equity (PIPE).”

Bill Ackman, the infamous hedge fund manager, launched his own $4 billion SPAC, Pershing Square Tontine Holdings (NYSE:PSTHU) to acquire a “mature unicorn.” Another SPAC was founded by Steve Burns, CEO of Lordstown Motors, which designed an electric pickup truck and raised $675 million. 

SPACs have another advantage besides the structural flexibility, the companies can negotiate a price per share, said Don Duffy, president of ICR, a Norwalk, Connecticut-based strategic communications and advisory firm that has advised on dozens of SPAC transactions.

“Since SPAC shares trade post-merger announcement, all shareholders – a Robinhood account holder or a Blackrock fund – get to participate, which is a true democratization of the IPO process. This is all much more transparent than a traditional IPO process.”

In a recent blog, Howard Lindzon noted that he recently spoke with Malka, who told him something that really stuck with him. In a blog, Lindzon wrote: “He explained that SPACs are like Dot Coms were to the investing world back in the 90’s. It is what you do with the .com that mattered!”

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