spac

SPAC markets erase 2021 gains amid possible regulatory headwinds

Business

Bill O’Brien, Editor

“There may be advantages to providing greater clarity on the scope of the safe harbor in the PSLRA (Private Securities Litigation Reform Act). Congress could not have predicted the wave of SPACs in which we find ourselves. It may be time to revisit these issues.” – Jon Coates, Acting Director, Division of Corporation Finance (SEC)

Coindesk

The SEC’s Acting Director of Corporation Finance, Jon Coates, has called on Congress to reign in SPACs and tighten regulatory disclosure requirements on the “blank check” companies.

What used to be a niche investment vehicle that served as an alternative for privately-held companies to enter public markets is now regarded as a market craze, a change that has taken place amid the historic, pandemic-induced 2020 market crash. Companies looking to go public partnered with SPACs to take advantage of markets flush with capital but volatile amid the backdrop of the coronavirus pandemic. Unfortunately though, SPAC moguls, like Bill Ackman, who the Collegian covered in its Feb 10 issue, are learning that, like all good things, the SPAC craze must too come to an end. 

SPAC markets have taken a sharp downturn in recent months, and even more trouble is on the horizon due, in large part, to heightened regulatory scrutiny for the investment vehicle. John Coates, the SEC’s Acting Director, Division of Corporation Finance, released a statement on the Securities and Exchange Commission’s (SEC) website sounding alarms on the SPAC surge. The SEC’s statement, SPACs, IPOs and Liability Risk under the Securities Laws, contained verbiage that has likely contributed to the recent downturn in SPAC markets. The SEC is now eyeing SPACs for the potential they have to mislead investors as they have significantly less disclosure requirements than a traditional IPO would have.

  In the statement, Coates discusses how 25 years ago, the path to public markets for a company was fairly simple and one-tracked and, with the innovations markets have today, there should be regulation to follow along with it. “With all these changes, the appeal of understanding and developing law around economic substance over form may be greater than ever.” Coates talks about how initial public offerings are a “distinct and challenging moment for disclosure” for companies undergoing them for good reason. “An IPO is where the protections of the federal security laws are typically most needed to overcome the information asymmetries between a new investment opportunity and investors in the newly public company,” says Coates.

Coates ends the statement by calling for legislative bodies to consider imposing tighter requirements that would target the second phase of a SPAC transaction, otherwise known as the “de-SPAC,” where a target company is acquired and original investors in the SPAC typically unload their shares into the secondary market. Coates calls on authorities to treat the de-SPAC transaction as the “real IPO.” “It is the de-SPAC as much as any other element of the process on which we should focus the full panoply of federal securities law protections — including those that apply to traditional IPOs.” Heightened regulatory pressures have further depressed SPAC markets that have already been reeling in recent months. The proposed regulation could increase disclosure costs for the blank-check companies which already face tough competition from private equity firms when hunting for target companies.

A SPAC index across 210 different companies, made up of 60 percent public companies derived from SPACs and 40 percent pre-IPO SPACs, “Indxx SPAC & NextGen IPO Index,” has fallen 24.87 percent since the SPAC market’s February highs. New accounting guidelines issued by Jon Coates and Acting Chief Accountant of the SEC, Paul Munter, have helped to grind SPAC markets to a halt as well. The statement, which read, “OCA (Office of the Chief Accountant) staff concluded that – the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings,” has the potential to impact newly issued SPACs and companies that have already gone public through a SPAC transaction. Proponents of the investment vehicle are eyeing financial regulators to see what moves they will make to tighten regulations around the investment vehicle. Eyes will surely be on the SEC in the coming months to see how they choose to advance their agenda as laid out by John Coates.

Bill Ackman: famed hedge fund founder and investor, now a SPAC behemoth

Business

Bill O’Brien, Editor

businessinsider

Ackman was ridiculed for turning a $27 million hedge position against markets into $2.6 billion. Just a week before, he had been interviewing on media outlets warning that “Hell is coming” amid COVID-19 concerns.

Few figures have stirred as much buzz in the financial services industry as Bill Ackman. The self-proclaimed activist investor, or contrarian investor as known by others, has been a leader in financial services since 1992 when he founded the hedge fund, Gotham Partners. It was the same year he received his MBA from Harvard Business School. Although Gotham Partners did not pan out as Ackman had probably hoped, his career in asset management would continue to flourish with Pershing Square Holdings, the hedge fund he founded in 2003 and currently manages.

Ackman is currently the CEO and founder of Pershing Square Capital Management, a New York-based hedge fund which, according to SEC filings, boasts private funds with minimum subscriptions between $1 million and $5 million. He’s had a lot of success in the hedge fund industry with a highly profitable and publicized market exit from Wendy’s that netted his investors billions in returns. More recently, Ackman opened hedge positions against financial markets leading up to the COVID-19 pandemic. Ackman closed out the hedge positions for over $2 billion on March 23rd, 2020 following steep market downturns.  The position originally cost a little less than $30 million to take on.

The success of the hedge fund manager has come with a lot of notoriety. Ackman was heavily criticized for a failed short position and a negative media campaign that landed him in hot water with regulators. Pershing Square Holdings also garnered huge losses over a 6-year period until he finally closed out the position in 2018 following an unbridled rise in Herbalife shares. The failed short resulted in losses for investors, but was heavily scrutinized for the negative media campaign Ackman waged against Herbalife that many saw as a means to manipulate the share price of the stock, an issue that has recently been at the forefront of Wall Street criticisms today.

In spite of great shortcomings and even greater successes, Ackman is as active as ever in financial markets and has recently decided to try his hand with SPACs or “Special Purpose Acquisition Companies.” The Collegian covered the upward trend in SPACs in its Sep 23 issue, and they have continued to be on the rise since. SPACs are somewhat known as “blank check companies” because they raise funds on the public markets without having any operational costs and expenses to start with. Their value is derived from investors anticipating the SPAC to merge with or acquire a privately-held company (target company) using the capital it raised from public markets, inherently bringing the target company to public markets in the process. 

Bill Ackman’s Pershing Square Tontine Holdings (NYSE: PSTH) has had the most valuable SPAC initial public offering to date, raising $4 billion from public markets and an additional $1 billion from Ackman’s Pershing Square funds. That $5 billion in available capital to make acquisitions can potentially mean approximately $25 billion in acquisition capital for the SPAC depending on how aggressive a leveraged buyout strategy Ackman chooses to employ.

Pershing  Square Tontine Holdings identifies its target company parameters on their website, “We will prefer targets that have low sensitivity to macroeconomic factors, with minimal commodity exposure and/or cyclical risk. We are willing to accept a high degree of situational, legal, and/or capital structure complexity in a business combination if we believe that the potential for reward justifies this additional complexity, particularly if these issues can be resolved in connection with and as a result of a combination with us.” Also notable, among other parameters, in their acquisition criteria for a target company is “formidable barriers to entry” or “‘wide moats” around their business and “low risks of disruption due to competition, innovation or new entrants.”

The goals of Ackman’s SPAC are nothing short of ambitious, but investors continue to put their faith in Ackman. After pricing at $20 per share during its IPO, Pershing Square Tontine Holdings, still without a business combination, is trading at $29.91 in secondary markets, yielding investors 49.55% since IPO. The premium can be partially accredited to recent buzz surrounding the SPAC potentially finding a target company, market speculation that has not been confirmed yet. Ackman has defended PSTH trading at a premium in Pershing Square’s 2020 semiannual report to shareholders “PSTH trades at a premium to its cash NAV because the market believes that it is probable that we will find an attractive merger candidate and complete a transaction that creates significant shareholder value.”

All of this may be true, but one can be certain PSTH will not be able to retain its value without an acquisition target. Speculation around an impending deal has risen significantly, and some are expecting an announcement when PSTH’s parent company, Pershing Square Holdings, holds its annual investors presentation on Feb 18 at 9:00AM. Market watchers will certainly be keeping their ear to the ground for the next eight days to see what direction Ackman takes his SPAC, if any.

obrienw4@lasalle.edu

Special Purpose Acquisition Corporations: Innovation in IPO Markets

Business, Uncategorized

Bill O’Brien, Editor

pitchbook

Special Purpose Acquisition Companies (SPACs) have been fueling IPO markets in recent months, generating buzz around the investment vehicles that have been around since the 1980’s.

There are sharks in the water in today’s markets, and no, I don’t mean that there are savvy investors with gills making trades from coves below sea level. In recent years, SPACs, or special purpose acquisition companies have taken on a much larger role in market participation and the initial public offering (IPO) scene than they have in previous years. SPACs themselves are actually quite an intriguing investment vehicle. Special purpose acquisition companies, essentially, pool money from investors, whether it’s from institutions or the general public, and use that pooled capital to acquire a stake within a company and bring it to the public market through a merger. SPACs provide companies with an alternate and “fast-tracked” means of gaining access to public funds.

Investment bank Goldman Sachs has had a lot to say about SPACs in recent months. Olympia McNerney, a member of Goldman’s equity capital Markets and alternative capital markets group in New York, spoke on the bank’s podcast, “Exchanges at Goldman Sachs” to talk about the trend. “Right now there are about 100-plus SPACs that are on the hunt for acquisition and to frame that in terms of dollars, that’s about $30 billion dollars of capital on the hunt to bring companies to bring companies into the public market.” That figure is further amplified by SPACs proclivity to make leveraged acquisitions so, in Olympia’s words, “that $30 billion, think of it as probably $150 of market cap that SPACs are on the hunt for, so a very very large number.” In discussing what is driving SPAC popularity with investors, Olympia discusses a number of reasons.

Evolution in the “profile” of the investment vehicle over “not just the last 2 to 3 years” but even over the last “6 to 12 months,” growing comfortability among institutional investors in understanding the economics of SPACs and SPAC economics becoming “more friendly” for the market makers invested in them and the companies looking to merge with them are just a few. Also discussed in Goldman’s podcast were the unique pros to working with a SPAC instead of having an IPO for a company. A potentially faster path to public markets, potentially more certain valuations around the company, and potentially more proceeds than an IPO could deliver, especially in today’s climate are pros Olympia cited as well

To Olympia’s point, SPACs are gaining traction in the world of high finance. Bill Ackman, founder of hedge fund Pershing Square Capital Management and notorious Valeant Pharmaceuticals investor, founded his own SPAC this year, Pershing Square Tontine Holdings. It is currently the largest SPAC ever founded at $4 billion. The popularity is not surprising, as the IPO market experienced a lull due to pandemic-related market volatility, and we are not out of COVID-19 waters yet. SPACs are inherently more resilient to broad market sentiment considering the investors they attract, so they can create great opportunities for corporations looking to go public during an economic downturn.

Special purpose acquisition companies are becoming more popular in the investment community and are innovative instruments in the IPO market. What were once transactions that were exclusive to private equity funds are now open to the general public, along with the prospect of the lucrative returns they can bring. In a world with increasingly suppressed yield fixed income markets and high price-to-earnings equity markets, these kinds of instruments will likely become more popular to both the institutional investor and retail investor alike.

obrienw4@lasalle.edu