Bill Ackman, the billionaire hedge fund manager, raised the biggest SPAC on record -- $4 billion -- in July. In place of the usual 20% of the SPAC’s holdings, known as the founders’ share, he gets warrants in the merged entity that kick in when the stock price rises. Evercore Inc. came up with another structure that it trademarked in which such fees, also known as promotes, are delayed and issued based on performance.
While still lucrative, SPACs are increasingly in competition with each other, with more than 200 outstanding vehicles looking for transactions within a tight timeframe -- usually 18 to 24 months, Bloomberg data show. On top of offering more attractive terms and valuations, some sponsors are putting their own returns on the negotiating table to win deals, including offering to forgo part of the payout or delaying it, dealmakers said.
“In general, the better the quality of the sponsor team, the less promote they’ll have to forfeit,” said Eric Gomberg, head of SPAC banking at boutique firm Odeon Capital. “Valuation isn’t the target’s only consideration, but also what the SPAC sponsor team brings to the table.”
Interest Rates
The continued popularity of SPACs rests not just on deal structures, but also on whether interest rates remain near zero, keeping investors on the hunt for yield.
Investors see SPACs as low risk with the potential of big upside. They are able to recoup their investment if they don’t like the acquisition, while still keeping the warrants for shares that typically come with SPACs if the stocks trade up.
“Right now there is very little opportunity cost to putting your capital into SPACs, and the value of the fractional warrant is attractive relative to bond yields,” said Paul Abrahimzadeh, Citi’s co-head of equity capital markets for North America.
“SPAC volumes will be as active in 2021 as they have been this year, if not more,” he said. “If rates stay where they are.”
This article was provided by Bloomberg News.