Decoding the SPAC opportunity

From January 1, 2020, to March 31, 2021, 89 de-SPAC transactions have been completed, totaling over $145 billion of transaction enterprise value. An additional 117 announced de-SPAC transactions are currently pending close, 96 of which have been announced in the first quarter of 2021.

Further, there are 433 SPACs actively seeking acquisition targets, representing over $125 billion of IPO proceeds. An additional 252 SPACs have filed for IPOs, 247 of which filed in the first quarter of 2021, demonstrating the explosive growth of the SPAC market.

SPAC founders include a wide range of investors, from corporate entities to sports stars. Increasingly, alternative asset managers have formed SPACs as an investment vehicle of their own or as a vehicle to provide an exit route for underlying portfolio company investments.

In other cases, the fund manager only provides an underlying portfolio company of a fund as the acquisition target for a SPAC.

While many SPACs do not advertise a specific industry or focus on an intended target, technology, media, and telecommunications (TMT) remain the most targeted industry among active SPACs, with more than 33 percent of total active SPACs, followed by the healthcare industry.

The largest de-SPAC deal in the TMT sector was of Skillz Inc., a San Francisco-based mobile gaming company. The transaction valued the company at $3.3 billion, reflecting a revenue multiple of 19.5x. The trading enterprise value of the company as of May 31, 2021, is $6.1 billion, almost double what it was originally transacted for.

Some of the notable TMT transactions in 2020-2021 are as follows:

Healthcare has seen a lot of traction in the last 12 months with many companies bagging sizeable deals. Cano Health, a Miami-based company, which operates healthcare centres and pharmacies, recently raised $3.5 billion with a revenue multiple of 5.9x and an earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 72.7x.

Some of the notable healthcare transactions are as follows:

Financial services companies have been able to garner the largest of the fundraises through SPACs.

UWM Holdings Corporation, the largest wholesale mortgage lender in the US, raised $18.1 billion at a revenue multiple of 10.5x in late 2020 and SoFi Technologies, a large consumer digital lending player, raised $7.9 billion at a revenue multiple of 21.5x in early 2021.

Some of the notable financial services transactions in 2020-2021 are as follows:

The hotel, gaming and leisure industry is another industry that has been active in de-SPAC transactions. This includes companies that operate casinos, resorts, online gaming and betting, social network games, among others.

Some of the notable transactions are as follows:

Even though a SPAC’s sphere has been increasing exponentially around the world, it is still in its early days in Asia-Pacific. In Q1 2021, there were 11 APAC-focused SPACs that were set in the US as compared to 18 in 2020, and there are several more in the pipeline.

Some of these include:

Bridgetown Holdings Limited, focusing on targets in technology, financial services and media sectors in Southeast Asia

Malacca Straits Acquisition Company Limited focusing on Southeast Asian conglomerates in media, food processing, renewable energy and healthcare

SVF Investment Corp, which is part of Softbank, focusing on mobile communications technology, artificial intelligence, robotics, cloud technologies, software broadly, computational biology, semiconductors, transportation technologies, consumer internet and financial technology

In addition, many more unicorns in APAC are looking at global listings through merging with a SPAC. Grab has announced a merger with Altimeter at a valuation of $39.6 billion. This will be the largest SPAC merger or de-SPAC transaction to date.

In India, while the rules to regulate foreign investments were altered to make them less stringent, we are yet to see major action. To date, only three Indian companies have been involved in a SPAC deal—Videocon D2H, Yatra and the most recent and biggest ReNew Power, with a gigantic deal size of approximately $4 billion.

ReNew Power, one of the leading renewable energy producers in India, merged with RMG Acquisition Corporation II, a SPAC listed on NASDAQ at a revenue multiple of 10.7x and an EBITDA multiple of 12.8x. Post the merger, ReNew will become a publicly-listed company on the NASDAQ.

As per media reports, several Indian companies are planning to go public:

To increase SPAC transactions in India, the government has allowed the SPACs to get listed directly on the stock exchange located in a special financials zone called Gujarat International Finance Tec-City or Gift City.

The regulations will be moderated by International Financial Services Centres Authority (IFSCA). This step may push the companies planning to go public towards the SPAC route as against the time-consuming traditional route.

Securities and Exchange Board of India (SEBI) is also planning to build a framework to ease the listing of non-operational entities in India. It intends to frame regulations to let these entities raise funds in an IPO as currently only operational entities are permitted to be listed on the stock exchange.

If SPACs are permitted to get listed in India, it could attract a considerable amount of foreign investors who would want to tap into private companies.

Given the proliferation of SPACs, the regulation and oversight around this ecosystem will likely continue to increase. In April, the US Securities and Exchange Commission (SEC) issued new guidelines related to SPAC warrant liability accounting and valuation.

The SEC effectively halted all in-progress offerings, business combinations, and new IPO filings until SPACs responded to the accounting and related valuation questions with respect to their warrants issued.

In response to the SEC guidelines, much of the SPAC ecosystem has been focused on warrant liability accounting and valuation. All SPACs have re-evaluated their historical accounting conclusions and, in many cases, restated their prior financial statements to reflect warrants as a liability.

Many SPAC founders, who are contemplating a new IPO, are now reporting warrants as liabilities from day one. Others are looking to revise warrant agreements that would prevent them from being treated as a liability for accounting purposes.

Some SPAC founders have argued that the reclassification of warrants from equity to liability on the balance sheet is much ado about nothing. The change has no cash impact and the quarterly change in fair value results in non-cash expense or income.

The fair value of the warrant liability will increase or decrease depending on several factors, most importantly, the change in the underlying share price and the publicly traded warrant price.

For example, if the fair value of a SPAC’s warrant liabilities was $20 million on the IPO date in October, $80 million on December 31, and $60 million on March 31, the SPAC would show an expense of $60 million ($20 millionn—$80 million) for the fourth quarter and an income of $20 million ($80 million—$60 million) for the first quarter—all non-cash.

Yet, many astute SPAC investors realise that warrant liability provides an indication of potential dilution, which will impact public shareholders at the time of a business combination.

The SEC’s focus on proper classification and valuation of SPAC warrants was somewhat of a wake-up call for many SPAC founders, boards of directors and the management of “de-SPAC’d” companies.

Agreements, which give rise to complex financial instruments, should be thoroughly reviewed for the proper accounting treatment, and when required to be reported at fair value, appropriate, informed judgment should be exercised in estimating value.

Although SPAC IPO activity continued to climb well past record highs, the number of IPOs during 2020 were nearly four times the 2019 total. The first quarter of 2021 alone eclipsed the previously record-setting 2020 totals. The market now has begun to see a bit of a cool down.

The private investment in public equity (PIPE) market has been slightly less active in recent months as investors have become more disciplined with the due diligence process. SPAC boards have also increased the use of independent fairness opinions as a best practice.

Additionally, the SEC has increased its scrutiny on SPAC deals. Most recently, with the change in accounting treatment for SPAC warrants. However, the current slowdown is expected to be short-lived as these developments are ultimately beneficial for investors, giving them more resources to bolster their trust in the process.

Given the current market valuations, potential capital gains tax changes, and the involvement of more traditional financial sponsors and financial firms, it is reasonable to believe there will be plenty of high-quality, private equity-backed companies and corporate carve-outs to support SPAC momentum for the foreseeable future.

The authors Aviral Jain and Aayushi Gupta are Managing Director and Consultant, respectively, at Duff & Phelps.