SPAC structure maturing as Palihapitiya secures another deal

SPACs, or special purpose acquisition companies that IPO with no operations other than the promise of merging with a target company within two years, are not a new financial construct. But their profile has risen massively over the last year as an alternative route to public status for emerging companies. Indeed 2020 saw more capital (around $80bn) raised through SPACs than in the previous ten years combined.

Their appeal for companies looking to IPO, is that they avoid the time-consuming and unpredictable road show process. Due to their widely accessible structure, SPACs might also manage to raise more investment capital than private equity forums. And they are often associated with highly respected industry executives, who themselves amplify the target company’s reputation as a draw for investors.

But why would a venture-capitalist prefer SPACs, and how is the process changing to defeat criticism and be even more investor-friendly? The main concern surrounding SPACs has traditionally been the question of whose interests they serve. Until recently the cost-structure gave sponsors usually around 20% of the equity of the merged company, which resulted in an immediate dilution for target company shareholders, including the original SPAC investors. This was the case whatever happened to the value of the stock after the merger, and could suggest that the sponsors prioritized finding a deal within the two year time limit (and keeping the upfront fees) over identifying the best target deal.

In efforts to make SPACs more credible and incorporate more safeguards for investors, sponsors are now making commitments to protect investors and ensure that SPACs remain an attractive option with a high degree of flexibility and low opportunity costs. Morgan Stanley has developed a new structure, the “Stakeholder Aligned Initial Listing (SAIL)”, which pins the sponsor’s equity to a percentage of the post-merger capital appreciation, only of the capital that the SPAC brought to the merger. This avoids the dilution described above and links returns closely to company performance. Other SPAC sponsors such as Jeff Sagansky and Harry Sloan, whose Global Eagle Acquisition Corp acquired DraftKing in December 2019, self-regulated and changed the terms so that they benefit only when the value of the target company rises significantly. Bill Ackman’s Pershing Square Tontine Holdings, which has raised $4bn and is possibly the largest SPAC ever, has also eschewed the typical 20% promote and delayed its rights to exercise its warrants for three years. Such moves have helped improve confidence and trust in the SPAC space.

As Chamath Palihapitiya announces his latest SPAC’s likely merger with SoFi (Social Finance), reflecting an $8.65bn valuation, the momentum in the sector shows no sign of waning. Investors are voting with their feet, or wallets, as to their confidence in the latest SPAC offers, while share value for Palihapitiya’s previous 2019 acquisition of Virgin Galactic has shown significant growth.

“Chamath Palihapitiya Launches Three More SPACs: IPOD, IPOE, IPOF,” Chris Katje, September 19, 2020.