SPAC boom shines spotlight on long-term performance as PE firms join frenzy

Special purpose acquisition companies, or SPACs, made a massive comeback in 2020 after years of waning popularity following the global financial crisis, and private equity firms are some of the biggest SPAC sponsors.

Worldwide, the number of SPAC IPOs soared to 305 in 2020, generating $84.66 billion in gross proceeds. The trend accelerated in 2021, with 269 SPAC IPOs completed as of March 12, raising $81.7 billion in gross proceeds, according to S&P Global Market Intelligence data.

North America, mainly the U.S., is dominating the SPAC scene, with 504 IPOs completed to date since the start of 2020. Nearly three months into 2021, new SPAC listings in the U.S. have already outpaced the total for 2020.

SPACs, also known as blank-check companies, are slowly getting traction overseas, with 46 IPOs in the Asia-Pacific region, 13 in Europe, nine in Latin America and the Caribbean and two in the Middle East.

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Private equity-sponsored SPACs are adding to the flurry of blank-check companies that are going public or have completed their IPOs since the peak of the pandemic.

Two of the blank-check companies that raised the highest IPO proceeds since the start of 2020 are sponsored by private equity firms, namely Thoma Bravo LLC and Ares Management Corp.

Thoma Bravo Advantage, which targets a business combination in the software market, concluded its IPO in January with $1.00 billion in gross proceeds. Ares Acquisition Corp. also raised $1.00 billion in gross proceeds from its IPO that closed in February.

Other high-profile private equity-sponsored SPAC listings during the pandemic include Hamilton Lane Inc.'s Hamilton Lane Alliance Holdings I Inc., which raised $276 million in its IPO that closed in January, and Cerberus Capital Management LP's Cerberus Telecom Acquisition Corp., which launched and concluded its IPO all in the same month of October 2020.

Building on the momentum, several private equity giants, including TPG Capital LP, Bain Capital LP, Warburg Pincus, KKR & Co. Inc. and General Catalyst Group Management LLC, have launched or completed more SPAC IPOs in recent weeks.

Main drivers

A key driver for the SPAC boom is the continual rise of the public equity markets, according to a March 1 report from consulting firm Bain & Co.

After an initial shock caused by the virus outbreak in March 2020, the stock markets bounced back, thanks to the U.S. Federal Reserve's effort to buoy the economy, propelling a rush into the IPO market.

Frustration with the traditional IPO process is also contributing to the SPAC surge.

"More and more companies are balking at the cost, hassle and uncertainty of the typical IPO process. SPACs and other innovations like direct listings are starting to fill the void," Bain said.

The uncertain direction of the economy stemming from COVID-19, despite growth expectations, is making traditional IPOs less attractive and SPACs a more viable alternative, Georges Archibald, regional managing director and head of Apex Americas at Apex Group, told S&P Global Market Intelligence.

"SPACs offer their PE sponsors a faster way to deploy capital and have downside protections to create liquidity if needed. Further, alignment with a SPAC sponsor can support growth strategies. And critically, all of these factors allow much more control in the process than the roadshow, auditing and other steps in a traditional IPO," Archibald said.

PE firms at the other end of the table are also tapping into blank-check companies as another avenue to exit investments.

Deal deadline

The structure of SPACs raises questions about their long-term stock performance and highlights the need to evolve, Bain stressed.

Created solely to buy an existing private company using capital raised in an IPO, SPACs must complete an acquisition within two years or return funds to investors and dissolve.

As the two-year deadline nears, SPACs are under pressure to complete a deal at any price and are at risk of bringing unproven companies to public markets at inflated valuations, Sia Partners SAS added in a Feb. 24 report.

"In the current overheated environment, any likely target with a public-company profile has SPAC sponsors lining up at the door," Bain said.

A handful of private equity-backed SPACs that launched over the past year have already struck merger deals ahead of the two-year timeline.

The Gores Group LLC's Gores Holdings V Inc., which concluded its IPO less than a month since its launch in July 2020, reached a deal in February to merge with metal packaging business Ardagh Metal Packaging SA. The transaction, which has a combined enterprise value of approximately $8.5 billion, is set to close in the second quarter.

Fortress Value Acquisition Corp. II, a SPAC formed by Fortress Investment Group LLC that went public in August 2020, is set to combine with outpatient physical therapy company ATI Holdings Inc. in an approximately $2.5 billion deal slated to close in the second quarter. The transaction would mark an exit for Advent International Corp. about five years after it acquired ATI.

In the week ending March 12, Cerberus Telecom Acquisition agreed to merge with KORE Wireless Group Inc. at a combined enterprise value of approximately $1.01 billion. The transaction is expected to wrap up in mid-2021.

Historically, shares of SPACs traded substantially better pre-merger than post-merger, Bain said in its report.

To ensure long-term gain, SPAC sponsors will have to balance finding the right deal in time, enhancing due diligence capabilities to vet their highest-potential targets and boosting performance through management expertise, talent networks and value-creation planning, the Bain report said.