July 23, 2020

Breakingviews: Bill Ackman’s $5 bln SPAC debut is market moment

by Breakingviews.

Will SPACs make the leap from fad to fixture? The biggest-ever listed vehicle designed solely to buy another company, backed by hedge fund boss Bill Ackman’s Pershing Square, starts trading on Wednesday. In 2020, U.S. initial public offerings of so-called special purpose acquisition companies and the value of deals struck by SPACs have already both outpaced previous full years.

Pershing Square Tontine Holdings raised a record $4 billion from investors. With an additional commitment of at least $1 billion from Pershing Square funds, the shell company can write an equity check for up to $5 billion as it hunts for a business to buy. A mature unicorn – a startup that has reached a valuation of $1 billion or more in private markets – is one type of candidate mentioned in the company’s IPO prospectus.

SPACs market themselves to targets as a way to bypass the often laborious traditional IPO process. That involves a lengthy back-and-forth with regulators, roadshows with investors, hefty underwriting fees, and proceeds that are unpredictable until the final moment. A direct listing, a less common approach adopted by Spotify Technology, for one, avoids much of that but doesn’t raise any cash.

The dollars involved are surging this year as SPACs get larger. U.S. SPAC IPOs have reached nearly $14 billion so far in 2020, according to Dealogic data, surpassing 2019’s record of $13.5 billion. Acquisitions stateside by the vehicles have also already topped last year’s $21 billion.

One reason for the growth is that SPAC terms have been improving, both for investors and for target companies. The one-sided gains that accrued to the sponsors – often individuals – behind early iterations of the structures have given way to lesser payoffs that are better aligned with other shareholders. Ackman said on CNBC on Wednesday that his was “the most investor-friendly SPAC in the world.”

Whether that’s enough to give SPACs serious staying power is another question. Streamlining the traditional U.S. IPO process or tweaking direct-listing regulations to allow simultaneous capital raising could reduce the vehicles’ appeal. So could a return to more normal market and business conditions as economies recover from the coronavirus pandemic. And if Ackman and others are really on a path toward taking no compensation from their SPACs, they too may lose interest.


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