October 13, 2021

Breakingviews: SPAC sponsor giveaways keep IPOs coming

by Breakingviews.

Raising money for blank-check companies is getting harder. Sponsors, who usually make far more money than anyone else involved, are having to pay up to get their initial public offerings away.

About 30 U.S. special-purpose acquisition companies are coming to market each month, according to Dealogic. That’s sharply down from around 100 per month in the breakneck first quarter, a period that also favored large blank-check IPOs including Soaring Eagle, backed by serial SPAC sponsor Harry Sloan, which raised $1.7 billion. Meanwhile, the pace of SPAC-related mergers, the deals the vehicles are created to do, is slackening, according to SPAC Research.

Sponsors typically collect a fifth of a SPAC’s stock after it clinches a merger, a lucrative prize known as a promote. Recently, some have dipped into this bounty to secure anchor investors in their IPOs. Law firm Freshfields looked at 12 recent deals where this happened, among the largest being a $300 million vehicle called Marblegate Acquisition sponsored by ex-Wall Streeters, finding that sponsors have mostly handed over 20%-25% of their promote shares to lure investors.

They are also giving IPO investors more upside in a couple of ways. Shares offered by SPACs typically come with warrants – rights to buy more shares in the future. It’s like an extra free bet on the success of an eventual merger. In all but a handful of February’s 98 SPAC IPOs, a share came with at most half a warrant, usually less; among 14 deals in October, half a warrant was the minimum, using SPAC Research data.

Meanwhile, the $10 each SPAC share sells for goes into a trust account, available to repay shareholders who redeem their stock or to liquidate the vehicle if it can’t find a merger. In all but three deals this month, sponsors have added cash to the account – something that basically didn’t happen early in the year. Just an extra 15 cents per share assures investors an almost risk-free 1.5% return.

A final concession by sponsors is to give themselves less time to find a merger target. All but one of this month’s newly public SPACs have 18 months or less. In February, virtually all could keep looking for two years. A shorter fuse helps initial investors get in and out more quickly. This tweak costs sponsors nothing except gray hairs; the others show that their gains are plentiful enough to make it worth sharing the love.


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