August 3, 2020 BARRON’S 15
received deals with financial-technol-
ogy companies and firms in online
gambling and sports betting.
Fewer warrants and greater sponsor
alignment can also expand the universe
of potential SPAC targets to industries
where companies tend to trade close to
the value of their total assets. Accepting
even moderate dilution can be a deal-
breaker for sellers of those companies.
“It’s going to make SPACs applicable
to a broader universe of asset types
where a 20% sponsor promote is too
dilutive,” says Mortara, pointing to real
estate and insurance as potential indus-
tries to mine for deals.
SPACs are also expanding by
targeting companies at earlier stages
in their growth. Most companies that
merged with SPACs have emerged
from private-equity portfolios. That
has meant mostly mature businesses.
But a new breed of more-specula-
tive targets has emerged, with Virgin
Galactic and Nikola as prime exam-
ples. “You’ve started to see concept
stocks use SPACs as a vehicle to
access the public markets,” says Vik
Mittal, portfolio manager at Glazer
Capital. “Those loss-leading but dis-
ruptive companies traditionally fit
more in late-stage venture-capital
portfolios, but there’s a lot of public-
market interest in owning VC-like
investments right now.”
Chamath Palihapitiya, an early
executive atFacebook(FB) who left
in 2011 to found the Social Capital
venture-capital fund, is focused on
that part of the SPAC market. His first
SPAC combined with spaceflight-
venture Virgin Galactic late last year,
and he has since raised two more
SPACs:Social Capital Hedosophia
Holdings II(IPOB), with $414 mil-
lion targeting technology investments
in the U.S., andSocial Capital Hedo-
sophia Holdings III (IPOC), which
raised $828 million and is focused on
tech companies abroad
“You have a massive supply/demand
imbalance now in the public markets,”
says Palihapitiya. “What that creates is
an enormous opportunity for younger
technology companies to go public
sooner, because it allows them to find
higher valuations and investors who
are willing to underwrite a very long-
term growth model.”
The red-hot market for SPACs will
cool. A high-profile merger could end
up being a dud, or a large SPAC might
not find a target by its deadline. Still,
the industry will continue to mature,
and SPACs aren’t likely to go away.B
ment team,” says Fir Tree’s Sultan.
That requires looking at previous
deals that sponsors have done, read-
ing up on their industry connections,
and combing through prospectus fil-
ings for details on how sponsors are
paid and what the potential dilution
will be—fewer warrants and post-
merger earn-outs are positive signs.
Once a SPAC has identified a
merger, the decision falls to the same
fundamental analysis that investors
would do for any operating company.
Merger announcements are usually
accompanied by a detailed presenta-
tion of the target’s business, financial
performance, and management
projections—disclosure greater than
that found in traditional IPOs.
Investors should also pick SPACs
focused on attractive target sectors, or
those with few competitors. Jeff Mor-
tara, UBS’ head of equity capital mar-
kets origination, sees the greatest short-
ages of SPACs in technology, biotech,
and those over $1 billion.
Current SPACs on the market in-
clude target areas like industrials, ESG,
cannabis, and Mexico.
Of late, anything related to electric
vehicles and the future of transporta-
tion has been hot. SPACs have merged
or announced deals with Nikola, Hyli-
ion, and Fisker, focused on making
EVs or alternative-fuel powertrains;
MP Materials, which mines rare-earth
elements needed for electric motors;
and Velodyne Lidar, which makes
sensors employed by self-driving EVs
and plans to combine withGraf
Industrial(GRAF).
There have also been several well-
each individual’s share of the pot
increasing as other investors die off.
For the SPAC, that means that only
investors who choose to participate in
the merger and do not redeem their
shares get access to a second pool of
warrants, fixed at 44,444,444, or two-
ninths per each unit sold at the IPO.
The more shareholders who redeem,
the greater the reward for those who
don’t. And because the additional
warrants are tied to the common stock
until after the merger closes, each pre-
merger share should trade above the
$20 redemption value.
Partnerships between financial
backers and experienced executives
have helped many SPACs.Moneyball’s
Billy Beane has teamed up with Red-
Bird Capital Partners, which filed for a
sports SPAC IPO this past week.
Sponsors with strong track
records—and expertise in hot sectors
like technology or biotech—will be able
to fill their IPOs without having to
include the “free-gift-with-purchase”
incentive of more warrants per unit.
But first-time backers may have to offer
more generous terms to fill their IPO
books. “Ithink that eventually there
will be the haves and have-nots,” says
Roth of Hudson Bay Capital.
Retail investors usually do not get
to participate in SPAC IPOs, leaving
them to consider the value of SPAC
units, shares, and warrants once they
have begun trading publicly. That
means weighing market price against
the sponsors’ ability to attract a prom-
ising merger partner. “The question
becomes how much are you willing to
pay for the option of a good manage-
“We’re a
unicorn
looking
to marry
another
unicorn.”
Bill Ackman on the
plans for his SPAC,
Pershing Square
Tontine Holdings
What the interior
of a Virgin Galactic
spaceship will look
like. The public
company started
asaSPAC.
ture where we do well but our inves-
tors do poorly,” Ackman says. “Because
it’s out of the money, it’s only on 5.95%
of the shares, and we pay for it, the
friction is very small.”
GS Acquisition Holdings II
(GSAH.U), the second effort from
Goldman Sachs Group’s (GS) Per-
manent Capital Strategies SPAC unit,
plans to tie its promote shares to a
vesting schedule that means the post-
merger stock price needs to rise to
certain levels before sponsors benefit.
“We don’t think we should be paid
if we can’t deliver an asset that will
perform well for our investors,” says
Tom Knott, GSAH II’s CEO. “We hope
that every SPAC follows this model,
but we’re cognizant of the fact that
we’ll likely have to close a transaction
with the structure in place before it
takes hold across the market.”
GSAH II went public by selling
units including a quarter of a warrant
in June, raising $750 million. Like
Goldman’s first SPAC, which merged
withVertiv Holdings(VRT) earlier
this year, the new SPAC is targeting a
mature business.
Such earn-out structures could
help shake off the old reputation of
SPACs as a vehicle designed to advan-
tage sponsors at the expense of other
stakeholders. Another trend that
could help, by encouraging longer-
term shareholders, is fewer warrants
per unit at the time of the IPO.
Common stock-only SPAC IPOs
are also becoming a reality. After first
filing with a third of a warrant, bio-
tech-focused RA Capital refiled its
first SPAC with an increased offering
composed of just common shares at
$10 each.Therapeutics Acquisition
(TXAC) went public on July 8, raising
about $135 million.
“We wanted to have the cleanest,
most company-friendly SPAC struc-
ture ever executed so that we would
have a simple pitch that would help us
to more easily attract a high-quality
company to merge with us,” the
SPAC’s chief financial officer, Mat-
thew Hammond, wrote in an email.
The lack of warrants clearly hasn’t
sapped demand: Therapeutics Acqui-
sition stock recently traded near $14.
For Pershing Square Tontine Hold-
ings, the warrant structure includes
an extra twist. The IPO included 200
million $20 units sold with just a
ninth of a warrant per common share,
exercisable at $23. A tontine is a 17th
century annuity in which income is
Courtesy of Virgin Galacticshared by a pool of investors, with
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