SPACs : Rise of The Blank Check Co
The Rookie VC #12
Hi everybody ! Today I wanted to talk about an interesting trend in the US tech financing market : SPACs. Amidst a frothy market, SPACs take a new approach at how to IPO a business literally from a blank sheet. We will also discuss how this new wave of SPACs could come to Europe, in some aspects a surprisingly favorable ground for this type of investment structure.
Let’s dive right into it.
Traditionally, one of the possible growth financing avenues for business is to sell shares to investors in an initial public offering (IPO), which is a long and painful process involving multiple parties: a lead advisor to structure the transaction, a horde of underwriters that are tasked with selling your stock during a roadshow that stretches months and sometimes years on end. Upon such a transformation change, many companies come to experience an unprecedented degree of complexity and scrutiny, and it can change their culture durably.
SPACs, on the other hand, are another approach at taking a business public. A Special Purpose Acquisition company is effectively an empty shell company, advertised to both Private Equity investors (Buyout funds, growth VCs, etc) and institutional public investors (Pension funds, mutual funds, hedge funds, insurance companies, etc..). Upon listing, it has no other operational purpose but to acquire or merge with a target company with the proceeds it will gather. They allow retail investors to invest in Private Equity or VC-type assets.
To be successful, a SPAC needs a sponsor. Sponsors typically are either individual investors carrying a lot of clout in the investment and business community, or an organization that has extensive experience and track record in this type of transactions, and is known to be able to market this type of investment to retail investors. The sponsor also typically co-invests in the SPAC, a share varying between 15 to 20% of the equity offered to the public. In a US SPAC, the decision of the sponsor to invest in a target company has to be approved by the majority of shareholders prior to launching the acquisition process. Interestingly, SPACs can also be lightly leveraged: it is not unusual to see 10%-20% of additional capital provided in the form of debt post-IPO.
For a company and a sponsor, using a SPAC to take a company public has three salient advantages:
Certainty of the financing round. The key aspect of certainty is price. In an IPO, the company begins the process by assessing at what price it could value the securities for sale in the IPO. The big advantage of a SPAC is that it offers an opportunity to only negotiate the price and terms once with only one counterpart.
Speed. Most IPO processes will take over a year of work. Associating with a SPAC sponsor is in that regard a very good idea: most of the paperwork and menial regulatory tasks associated with an IPO are already done taking care of. Companies that might not have a very well-known industry that has already won the confidence and trust of retail investors can rely on the weight that its sponsor can carry if the rest of the deal can’t.
Branding and marketing. This specific factor underlines how crucial the role of a sponsor is in a SPAC listing. A very charismatic, messiah-like figure like Chamath Palihapitiya’s can cause interested investors to bet much higher than in a normal IPO process. It is arguably somehow a very American phenomenon linked to the apetite for charismatic iconoclasts, and to my knowledge few to no SPAC deals in Europe happened for that reason, rather for the prestige that the name of the sponsor would inspire to otherwise frothy retail investors.
Banks working for you.
Traditionally, banks are not at all aligned with companies they help become public. First, banks acquire both short and long options to cover for their losses or take a higher share of the profit depending on the trajectory of the stock. Second, the bank’s job is to police the market so that it keeps orderly and isn’t dis-proportionally left exposed to greedy executives that would overprice their business. Instead of reinforcing regulations that would hurt other parts of the financial system, the public has chosen to give the keys to the market to banks, effectively earning a hefty profit while doing so (3 to 7% of the proceeds on average).
In a SPAC deal, your advisor bank will only help negotiate and broker the M&A deal once you have selected a target. Your well-known, well-respected sponsor will be the one that does the job of selling your stock to the general public. Against a massive fee that is passed onto your sponsor - who is eventually on board for much longer than a bank in an IPO - you can get rid of many rules and have price transparency upfront.
Virgin Galatic. Virgin Galatic was a subsidiary of larger group, a space exploration company focused on inhabited flights for individuals and researchers. While other initiatives focus on building infrastructure up in space (Space X, Blue Origin), Virgin Galactic wants to massively democratize space travel for the masses as a second-order stake of the current foray of the human race beyond our pale blue dot. In its SPAC deal with culty and iconoclast investor and former Facebook executive Chamath Palihapitiya, the company has raised $450m in primary proceeds, valuing the overall company at over $2.3bn
Nikola Motors. Nikola Motors is actually an odd clone of electric vehicle company Tesla, only it launched a series of hydrogen-powered trucks with the intent of building the energy infrastructure needed to support them. Their SPAC deal with VectoIQ - A SPAC venture formed to hunt for a mobility and transportation target to roll up - has yielded a whopping $12.3bn at listing, climbing up to $31bn in its highest peak. The deal has although sparked a massive amount of controversy around various topics: claiming it could lease trucks to clients and then pass the leases onto third-party investors to reinvest the proceeds into the network (essentially selling the same asset twice), founder Trevor Milton copping up a $32.5m ranch right after the financing round, applying for an undeserved COVID-19 small business emergency funding, amongst other things
Velodyne. Velodyne is an engineering and research company, behind the now soon-to-be widely adopted LIDAR sensor, used for geospatial detection in autonomous vehicles and machines. After gathering investment from companies like Ford, Baidu, Hyundai, Velodyne was able to market a $150m transaction sponsored by Graf Industrial, in which the existing shareholders and the founders would collectively own 80% of the newly listed company. Velodyne is particularly attractive, as it is the only serious contender in place to supply sensors for under $100, where most of the competition still sells in the thousands of dollars a piece.
Draft Kings. Draft Kings is an online fantasy sport contest and betting provider. The company is surfing on the wave of legalization of online, privately run betting and was the first operator in many US states (New York, New Jersey, Indiana, West Virginia, etc.). The total raised by the fantasy gaming and betting company amounts to $650m at a $3bn valuation, which shows investor enthusiasm for a defensive play in the light of the cancellation of many real sports events. The sponsor for this deal was entertainment veteran Jeff Saganski, an usual suspect with no more than 6 SPAC deals under his belt.
In writing this piece, one of the first questions I’ve come to ask myself is: why aren’t we seeing more tech (or non-tech) SPAC deals in Europe ? While doing my research, I realized that Europe and some of its exchanges had some perks offer to potential candidates, but that the track-record it offered was a mixed bag.
There is a relative lack of clear statistics regarding the volume and amount of SPACs in Europe. In 2019, Bloomberg published an article stating that H1 2019 had been particularly disappointing with only one SPAC deal raising $34m, a sharp decline compared to the 10 SPACs of 2018 raising just over $1.45bn. These were unfortunately the most recent public statistics I was able to pin down.
Here is a quick overview of the main rules in Europe :
Looser regulatory constraints. Although there has been some SPACs listed on Euronext, the preferred exchange for these vehicles is the London AIM. Unlike their US counterparts, AIM-listed SPACs are not required to comply to most governance rules that listed corporations on the LSE respond to. On the other hand, that leads to a more suspicious eye cast by the Financial Conduct Authority or the local regulator on SPACs. Nat Rothschild knows something about it : after raising $700m in 2010, it faced listing violations claims rapidly.
Voting rights. Here, the French regulation differs from the AIM ;
Based on one of the rare instances I was able to find in France (Mediawan, one of the biggest European SPACs), shareholders are required to vote on the target acquisition project in a general assembly without the presence of the founders and the sponsor to influence the vote. In the event of investors voting against the project, it has a legal obligation to buy back their shares. And in the event of a 30%+ refusal vote, it is obligated to propose other acquisition targets to its shareholders. In the same fashion, no investment in a two-year timeframe means that the SPAC will be liquidated and funds returned pro-rata to initial investors
In the UK, you basically have two choices. You can either seek an AIM listing, in which you will have several advantages: no need to appoint a financial adviser, no need to designate a specific sponsor, no pre-emption rights for shareholders, no theoretical time limit for investments, greater flexibility for investors to exchange shares. The second route is to list in the Standart Listing compartment of the London Stock Exchange, which has even lighter rules. In addition to what’s been evoked above, you do not need to comply with the UK Corporate Governance Code, and do not need a “Nomad” or nominated advisor. In both cases, the shares are redeemable in the event of a dissenting vote, but the additional 30% protection does not apply in UK listings
I’ve then come to wonder why we did not see more SPACs emerging in Europe, amidst the extreme volatility of the stock market both at home and in the US, and the many uncertainties and disappointments in European Tech IPO projects in the last few years.
When we look specifically at Mediawan and its thesis in the consolidation of new media back when it was founded in December 2015, what do we see ? What does it tell us in terms of future perspectives ?
Charismatic, public business faces.
What we see : The founders of our landmark SPACs are the Chamaths of France, spearheaded by two of the most indisputably iconoclast financiers of France: Xavier Niel and Matthieu Pigasse. Their third partner, Pierre-Antoine Capton, is also a very well-known television producer who only added to the clout necessary to make the $250m deal possible
My prediction : As our ecosystem matures, a second or third generation of repeat entrepreneurs will reap the reputation benefits of widespread success, especially in businesses heavily invested on the consumer side. Although France has no shortage of able business leaders with the amount of clout necessary for a SPAC deal, I’m wondering what tommorow’s repeat entrepreneurs could yield in that specific market in the future. I am sure consolidation-ripe software or marketplace businesses could be interesting targets in the future, as their importance continually grows.
A compelling thesis.
What we see: This specific deal outlined a simple yet very compelling thesis around the consolidation in new media, coupled with the existing track-record of Xavier Niel and Matthieu Pigasse and their investment in Le Monde. Although bumpy at times, they have managed to keep the business afloat and most importantly editors and reporters on their side for quite some time - Although things recently started to deteriorate between Matthieu Pigasse, who has agreed not to sell shares to billionaire Michail Kretinsky viewed as a threat by the employee group. All of this goes to show that they are very savvy leaders with a fine-tuned comprehension of how exotic private and public transaction works. They were able to leverage some of that clout on their SPAC deal.
My prediction: The growth capital industry in France is exploding. We’re seeing the emergence of many new funds (Gaia, InfraVia Growth, etc.), bigger vintages of multi-stage powerhouses (Idinvest/Eurazéo, Partech Growth), and will have to find exit perspectives in a frothy French stock market, where the massive tech and software IPOs often get delayed or cancelled. In my opinion, it isn’t impossible to imagine a few top-tier players of the growth scene propose a SPAC deal around an easily marketable business with sound economics and a recognizable brand (e.g. Doctolib, Deezer, ManoMano, etc). In that scheme, they would intervene up to a certain percentage, then team up with bigger institutional investors to fill up the rest of the allocation. Unfortunately, few individuals bear more clout than established venture and growth funds in France, so a solid sponsor group seems like a plausible option.
Ressource list
SPAC Man Begins, Alex Danco
Europe IPOs Down While SPACs Nearly Halt, Bloomberg Law
SPAC To the Future, Collas Crill Blog
Analyzing European SPACs, Elena Ignatyeva, Christian Rauch and Mark Wahrenburg
Europe Misses Out on Booming SPACs, Financial News
If you have an opinion on the topic, questions or contradictions on what I wrote, please do ping me. I’m willing to dig deeper with anyone that has gotten closer to the subject.
@LarocheUlysse on Twitter ! :)
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