Capital Markets Market Trends

The blank-cheque boom

Special purpose acquisition companies, otherwise known as SPACs, have emerged as one of the hottest trends on US equity markets in the last few years. They exist as an alternative to initial public offerings and public markets for private companies. A SPAC aims to acquire a private company in order to take them public via a reverse merger process — where the target company actually ends up owning a majority of the acquirer.

The process

Founders of SPACs create these shell companies, also referred to as blank-cheque vehicles, which are then publicly listed in an IPO. The sole objective of this public listing and capital-raising is to acquire a target company within a certain time period — typically 2 years. Christopher Wolf, Goldman Sachs analyst, described SPACs as “combining private-equity style investing with public market liquidity” which perfectly summarises this two-stage process of obtaining liquidity from equity capital markets and investing this into a private company. If a deal is secured within the allotted two-year time period, the private company targeted will become public via a reverse merger instead of its own initial public offering. The incentive for private companies is that they bypass a rather lengthy and expensive IPO process and with a SPAC agreeing on the company’s valuation in advance, the private company avoids any last-minute changes to the amount of capital that can be raised, as often happens with IPOs. If a deal is not finalised within the time period, the SPAC is liquidated and dissolved, with investors recovering their initial investment plus interest. Between 2004 and 2008, such dissolutions occurred frequently, with only 86 of the 142 SPACs listed completing a deal within the specified timeframe. The success rate for current SPACs post-2010 is now much higher, at above 90%.

The boom

SPACs have raised $23.9bn this year globally (year ending August 5th) and $23.6bn of this has been in the US, validating that this is very much a US equity market trend. This figure is an increase of 70% on last year, with SPACs now accounting for 1 in every 5 US dollars raised in IPOs. Anu Aiyengar, co-head of global M&A at JPMorgan Chase, believes “everybody who has any standing in their sector is thinking about a SPAC”, confirming the recent boom. It is evident that the numbers point to a distinct rise in popularity for SPACs and a boom in what used to be a niche area of equity capital markets. However, what is not so clear are the underlying driving forces behind this boom. Supporters of SPACs point to a suite of new backers with top credentials boosting investor confidence, with billionaire hedge fund managers Bill Ackman and Daniel Loeb launching their own SPACs. Sceptics are not so convinced by this and believe that the abundance of liquidity in markets is what is creating this trend, particularly with the strong central bank support most economies have received in 2020 due to the COVID-19 crisis.

Michael Klein and the MultiPlan deal

Michael Klein, a former Citigroup banker, is the industry leader in SPACs, having raised $2.5bn through 3 blank-cheque vehicles since 2018. These vehicles are under the banner of Churchill Capital Corporation and are listed as I, II, and III respectively. Klein’s latest SPAC, Churchill Capital Corporation III, raised $1.1bn via its public listing and Klein was able to raise a further $2.6bn in new equity and debt from investors after selecting MultiPlan, the US healthcare company, as its target. This resulted in a deal valued at $11bn, the largest-ever transaction by a SPAC, with a $3.7bn cash infusion to help cut MultiPlan’s debts and expand the business. In July, Klein also filed plans to raise a further $1bn with a fourth SPAC launch for Churchill Capital.

The banks

The boom in SPACs has seen Credit Suisse return to the top 3 underwriters of equity offerings for the first time since 2005. Citigroup and Credit Suisse have established themselves as the top advisers on such transactions, whilst the top SPAC underwriters have been Cantor Fitzgerald, a mid-sized New York investment bank, and Deutsche Bank. With the market booming, investment banks are looking to reorganise their equity teams to take advantage of the opportunity, with a rise in SPACs generating increasing streams of fee income for underwriters. Banks typically earn 2% of the proceeds when the IPO is finalised and a further 3.5% when the SPAC finds a company to buy and completes the takeover. Goldman Sachs is ranked among the top 5 underwriters of SPACs since the boom began in 2017 and is uniquely positioned in that it has launched its own blank-cheque vehicles. The first of these was listed in 2018 and raised $600m to merge with Vertiv, a digital infrastructure group, in February 2020. Goldman’s second blank-cheque vehicle raised $700m in its June IPO.

Moving forward

SPACs are known to be notoriously fickle. The real test for this trend is how the companies perform on the stock market. Archimedes Advisors are a group of partners brought in by Michael Klein to help steer the acquired companies of Churchill Capital. They sit within Klein’s firm and aim to provide the management expertise to improve performance and profitability. The group includes Jony Ive and Alan Mulally, former executives of Apple and Ford respectively. The ability of this management team to instigate change and bring success will be a significant factor on the company’s stock market performance. Ultimately, big players such as Michael Klein and Bill Ackman will be important for the reputation of SPACs moving forward and whether this upward trend continues into the future.


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