How Are SPACs Affecting Private Equity?

As the SPAC boom thunders on, it’s impact on the private equity & venture capital transactions arena is beginning to be felt

How is the emergence of special purpose acquisition companies (SPACs) affecting the private equity deals market? With SPACs raising more money in Q1 2021 than the whole of 2020, it’s a big question for private capital investors. SPACs provide companies with a back door to public markets, so the vehicles are targeting the same pool of companies as private equity and venture capital funds. 

Surprisingly, just 8% of fund managers surveyed in November 2020 for Preqin’s 2021 Global Private Equity & Venture Capital Report said they had competed with a SPAC for an acquisition, and only 1% had lost out on a deal. The majority (64%) of private equity GPs said SPACs were having no impact on their business (Fig. 1). But this may change: 26% of respondents saw them as a potential exit route, with 5% of GPs having achieved an exit via a SPAC.

Making a SPACtacle of Themselves
Some of the most high-profile SPAC deals have been in the later-stage venture capital space, providing an alternative to a listing or pre-IPO round. Singapore-based taxi service Grab is going public on Nasdaq via a merger with a SPAC backed by Altimeter Capital. Altimeter’s vehicle will provide $750mn of a $4.0bn PIPE financing round which will value Grab at almost $40bn. Altimeter is based in Boston and Menlo Park with $10bn in AUM across early- and later-stage venture capital and hedge funds.

There has been a flurry of SPAC deals targeting companies in hot technology sectors. UK electric vehicle company Arrival emerged from obscurity in 2020 when it secured €100mn in funding from Kia Motors, Hyundai Motor, and UPS Ventures. The round was swiftly followed by an $118mn investment from BlackRock. In February 2021, Arrival became the largest-ever UK tech IPO when it completed a merger and PIPE deal with CIIG Merger Corp, valuing it at $13bn. CIIG was sponsored by Peter Cuneo – a US executive who has worked at Black & Decker, Remington Products, and Marvel Entertainment – his son Gavin, and Michael Minnick, a banker who worked at JP Morgan and RBS.

SPACs have not been shy of financing high-risk ventures with large capital requirements. For example, electric air taxi developer Lilium is planning a New York listing through Qell Acquisition Corp, a SPAC sponsored by former GM executive Barry Engle. Germany-based Lilium is looking to raise gross proceeds of $830mn, including investments from funds affiliated with or managed by Baillie Gifford, BlackRock, Tencent, Ferrovial, LGT, Palantir, Atomico, FII Institute, and PIMCO. The transaction would value Lilium, which plans to launch a commercial service in 2024 and be EBITDA-positive by 2025, at $3.3bn. Two other air taxi start-ups, Joby Aviation ($6.6bn valuation) and Archer Aviation ($3.3bn valuation), have also listed through SPACs. Archer is now the subject of lawsuit filed by rival Wisk Aero, which claims a former employee stole trade secrets.

SPACe in the Market
So how big an impact will SPACs have? The boom is heating up. In the first quarter of 2021 an astonishing 298 SPACs completed an IPO, raising a total of $97bn, according to SPACinsider. The Q1 2021 total broke 2020’s record set over a full year, when 248 vehicles raised a total of $83bn. With three IPOs completed in the first week of April and a further 254 in the pipeline, there is little sign of the mania abating.

As fundraising continues at breakneck speed, the pace of acquisitions is also beginning to increase. SPACs generally have two years from IPO to identify and complete an acquisition, so deals completing now reflect the funds raised over the past two years. For 2019 vintage SPACs, the number of completed deals (yellow) is higher than announced deals (grey), and those still searching for a transaction (orange, Fig. 2). Among 2020 vintage SPACs, 26 have completed a deal, with 92 announced and 130 still searching.

The pressure on SPACs to complete deals is intense, and their structure means there is little incentive for sponsors to liquidate without completing one. While there are more than twice as many SPACs currently searching for an acquisition (434) as have completed deals over the past 12 years (196), the pace of acquisitions is increasing and, based on the experience of the past decade, deals will be done. Among 2018 vintage SPACs that have reached the end of their two-year deal window, just one liquidated without finding a deal. This compares with 32 that completed deals, 19 that have announced but not yet completed a transaction, and seven that are still searching.

Where Next for SPACs?
With such a large volume of SPAC money chasing a limited set of opportunities, speculative prospects and SPACs could be the perfect match. The situation is reminiscent of the latter stages of the dot-com boom of the late 1990s, where many new types of investor entered the venture capital space. While a rise in valuation and access to capital is appealing to these companies, some will undoubtedly not be ready for the scrutiny that comes with a stock market listing.

Private equity funds, venture capital funds, and their advisors, will already be knocking on SPACs’ doors with assets from their portfolios and – at least for the next few years – an additional exit route will be viable.