Aug 19, 2020 - Economy

SPACs undergo fast evolution as they outpace traditional IPOs

An illustration of checkbooks

Illustration: Sarah Grillo/Axios

Special purpose acquisition companies, or SPACs, are all the capital market rage right now, easily outpacing traditional IPOs. But, with great volume comes great pressure.

Why it matters: SPAC structures, which had remained stable for more than a decade, are quickly changing.

Background: SPAC sponsors traditionally get two things upfront...

  1. Around 20% of the SPAC's common stock, post-IPO, known as founder shares.
  2. Warrants to purchase more common stock, exercisable at a fraction of a common share.

Quick take: This has obviously been a pretty sweet deal for the sponsors, assuming they eventually consummate an acquisition. Not quite money for nothing, but not too far off.

Yes, but: What's happening now is downward pressure on those terms.

  • Most of this has been on the warrant side, where sponsors once were able to redeem for upwards of 2/3 of a common share.
  • Goldman Sachs, for example, recently dropped warrant coverage on a sponsored SPAC from 1/3 to 1/4, and Kevin Hartz's new SPAC began at 1/4.
  • Bill Ackman's recent SPAC, which raised a record $4 billion, did away the upfront founder shares concept altogether. Instead, it gets paid more like private equity carried interest, inclusive of a hurdle rate.
  • It's hard to see too many others following him down to zero, but don't be surprised to see 20% become an artifact.

Driving the news: Part of it is simple supply-and-demand competition, given the SPAC spike. But part of it is an influx of a new class of sponsor, including investors who view the SPAC landscape as if it were an orchard in what would later become Silicon Valley.

  • "I think this is a revolution, and [changing the terms] could break the backs of lots of these opportunistic carpetbaggers," Hartz says.
  • He adds that SPACs are "just in the top of the 1st inning," and that many well-known Silicon Valley venture firms are exploring sponsored SPACs.

The bottom line: If you don't like what you see from SPACs right now, just wait a couple months.

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