How SPAC Skepticism Has Given PIPE Investors an Edge
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Lazard Insights
How SPAC Skepticism Has Given
PIPE Investors an Edge
Dmitri Batsev, Managing Director, Portfolio Manager, Lazard PIPE Opportunities strategy
Jason Katz, Vice President, Client Portfolio Manager, Lazard PIPE Opportunities strategy
Put very briefly, SPACs, special purpose acquisition companies,
Summary are corporations created solely to acquire a privately held target
• Special purpose acquisition companies (SPACs)
company through a merger, known as a de-SPAC. SPACs trade
have emerged as a viable alternative to initial publicly on an exchange and have up to 24 months to do their
public offerings (IPOs), because they are often de-SPAC deal. Once the SPAC has completed the deal, the listing
faster to arrange and consummate, and offer
of the merged entity changes from that of the SPAC to that of the
greater clarity of pricing and capital.
target company.
• SPACs became very popular very quickly
over the past year, attracting a great deal of Historically regarded as a dilutive and less desirable alternative to
attention, much of it unfavorable, owing to the
excesses that often accompany a frothy market. conventional IPOs, SPACs became wildly popular in the snapback
equity rally that followed the COVID-19 market crash. Wall Street,
• In our view, the controversies have actually
enhanced opportunities for serious investors seeking to capitalize on the rally’s momentum, turned to SPACs as a
who backstop most SPAC deals in the form quick and efficient route to take companies public.
of a private investment in public equity, known
as a PIPE.
SPACs Arrive
• We believe that SPACs, despite the recent
controversies, are on their way to becoming We see four developments accounting for SPACs’ recent popularity:
a permanent part of the capital markets
landscape and that PIPEs now offer the most When companies go public through a traditional IPO in the
promising entry point. US, they almost never offer financial projections for their own
outlook because of the legal liabilities entailed in doing so. In
Lazard Insights is an ongoing series designed to share value- the de-SPAC process, the target company can provide forecasts
added insights from Lazard’s thought leaders around the
world and is not specific to any Lazard product or service. because technically it is not going public but is rather being
This paper is published in conjunction with a presentation acquired by the SPAC.
featuring the authors. The original recording can be accessed
via www.lazardassetmanagement.com/insights. Well-known sponsors and successful private companies began
taking advantage of the speed, confidentiality, and certainty of
the SPAC process, relative to IPOs. This development influenced
the following two.
2
SPAC shares typically come with warrants attached, the right
to buy shares in the de-SPAC in the future at a pre-arranged
price. In practice, the warrants dilute the value of the originally
A Guide to the Acronyms
issued stock, which made SPACs an excessively costly way to A SPAC exists solely to use the capital it raises from
go public. Over the last several years, as the quality of SPACs investors to acquire a company through a merger.
improved, the number of warrants they needed to issue to The merger effectively transforms the SPAC into
attract investors came down.
the operating company while providing equity capital
Fixed income investors began to treat SPACs as bond proxies. to bolster the operating company’s balance sheet
They could detach the warrants and sell them to generate prior to its going public. The process begins when a
coupon-like income while retaining the associated SPAC shares, SPAC’s sponsor issues shares in the SPAC at a par
which they could later redeem at par in case they disapproved value—generally $10—through an IPO, creating a public
of the SPAC's acquisition, with the SPAC's redemption feature
enterprise with no assets other than cash. That money
approximating the fixed income investor's claim on a bond's
is placed in a trust, and the sponsors typically have two
principal (see “A Guide to the Acronyms”).
years to effect a merger with a private target company.
Where There’s Smoke, There’s Fire If they fail to come to a deal within the allotted time
frame, they must return the money, plus any interest,
A boom as explosive as the one SPACs experienced over the
to the SPAC’s shareholders. For their role, the sponsors
past year generates considerable smoke and fire: the smoke,
the excesses of taking a good thing too far, which, in the case receive a slice of the cash in the trust in the form of
of SPACs, the media has thoroughly covered; and the fire, the founders’ shares, or a “promote.”
very real advantages that touched off the boom in the first place. The market labels the deal in which a SPAC merges with
Distinguishing between the hype and the real deals requires a a private target company a “de-SPAC.” Upon closure of
thorough analysis of each SPAC’s proposed acquisition target.
the deal, which usually occurs several months following
The de-SPAC process affords ample opportunity for just such the public announcement of a definitive agreement,
analysis through a PIPE, which allows select investors the shares of the de-SPACed operating company trade
opportunity to scrutinize and buy into a proposed deal before the under the name and ticker symbol of the newly public
market is even aware of its existence. Because of the intensive nature target company.
of the research and the expertise required to properly evaluate closely
held companies, reputable sponsors and their targets are likely In most cases, the money a SPAC raises in its IPO falls
to favor well-known fundamental investors with the resources to short of the amount necessary to buy out its acquisition
conduct thorough due diligence on PIPEs and the capital to fund target. The sponsors will then seek to fill the funding gap
them. Such investors help validate the deal to the market, since their through a PIPE, a private investment in public equity, to
participation in the PIPE indicates that the deal has been properly which the sponsors issue shares at par value in exchange
vetted by independent third parties whose interests align with the for cash. While anyone can invest in a SPAC, PIPE
investors’ rather than with the sponsors’ and their targets’ (Exhibit 1). investments come by invitation only. The SPAC sponsor
and the SPAC’s target company allow select prospective
Exhibit 1 PIPE participants to conduct a thorough inspection of
PIPE Advantage: Access to Target Company Data before the the target’s finances, operations, and management—in
Rest of the Market Even Knows the Deal Exists
other words, to comb through the material non-public
Potential PIPE investors receive access to: information before the merger is formally consummated
Detailed company/product presentations and announced to the public.
Financial projections
Financial models (in some cases)
Meetings with the target’s management
Meetings with the SPAC’s sponsors
Source: Lazard3
Anatomy of a Roller Coaster Ride A confluence of factors reversed the trajectory: regulatory scrutiny,
disappointing operating results from some de-SPACed companies,
Between 2009 and 2014, SPAC issuance averaged little more
and a market oversaturated with SPACs seeking deals. The Securities
than $1 billion a year. The pace picked up a bit to 2019, and
and Exchange Commission (SEC) warned against target companies’
in 2020 it exploded, exceeding the previous year’s total nearly
use of lofty financial projections and also called into question certain
six times over. And the first quarter of 2021 alone topped all of
SPAC accounting practices. We find their admonitions encouraging.
2020 (Exhibit 2).1
We believe additional regulation will help establish SPACs as
legitimate vehicles and build trust with investors. Any SEC actions
Exhibit 2
to limit overly aggressive forecasting should also discourage lower-
The Great SPAC Surge quality, less mature companies from using SPACs. In many cases,
($B) such companies do not have tangible proof of concept, and their
100 97 projections are the primary determinant of their value.
83
80
The Sweet Spot
60
Because we believe the most attractive de-SPAC opportunities
40 will generally involve companies with proven business models,
established customers, and existing revenues, profitability, or both,
20 14
12 10 11 we do not expect regulations around projections to affect the high-
2 3 4 4 4
1 0 1 1 1 1 2 quality opportunity set. We currently estimate that opportunity
0
’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21
Q1 set—for PIPE investors alone—at $200 billion–$300 billion over
As of 31 March 2021 the next few years, with plenty of deals to choose from. More than
Source: Citigroup, FactSet 430 SPACs are currently searching for deals and some 250 have
filed for IPOs (Exhibit 4).
As sponsors raced to form SPACs, investors matched their
Exhibit 4
enthusiasm, not only by funding newly issued SPACs, but also by The Enormous SPAC Backlog Bodes Well for PIPE Investors
rushing into SPACs that had already identified—or were simply
Amount in Trust ($B)
seeking—targets. The inevitable creation of the first SPAC ETF 150
capped the excitement.2 During the height of the mania, between
120
November 2020 and February 2021, the ETF handily outpaced
the surging broader market. But the ride down was even faster 90
than the trip up. Between 1 March and 30 April, it gave back 436 SPACs with
60 $132 Billion
almost all of its gains (Exhibit 3).
246 SPACs with
30 $63.9 Billion
0
Exhibit 3 Currently Seeking Target Have Filed for IPO
The SPAC ETF Roller Coaster
As of 2 April 2021
Defiance Next-Gen SPAC Derived ETF vs. S&P 500 Source: Dealogic/BofA Securities
Index=100
160
Defiance Next-Gen SPAC
+55.8%
Derived ETF - Price
145 We believe it unlikely that this flood of issuance will be sustained,
and we expect to see elevated levels of SPAC liquidations in the
130 coming years as less-qualified sponsors fail to find attractive deals.
+20.3% By the same token, a reversion to more rational pricing should only
115 improve PIPE investors’ negotiating position with the hundreds of
S&P 500 - Price attractive private companies that will continue, in our view, to go
100 public via SPACs. The fallout from the market's overshoot has made
Nov ’20 Dec ’20 Jan ’21 Feb ’21 Mar ’21 Apr ’21 May ’21
the participation of respected and seasoned investors, with their
As of 21 May 2021 implied stamp of approval, even more valuable.
Source: FactSet4
Yet even as their participation as PIPE investors has grown more A decade ago, the majority of high-quality companies in each of
critical, we have seen evidence—firsthand and through underwriters these four categories would not even have considered going public
and the business press—that PIPE capital has become scarcer. through a de-SPAC because of the dilution it entailed. The dilution
Altogether, the combination of investor skepticism, a surplus of concern has receded as the size of the warrant grants has shrunk.
SPACs trying to beat the two-year clock to find deals, and fewer This, in turn, has augmented the inherent SPAC advantage of price
investors willing to top up those deals has helped PIPE investors clarity—and magnified the value of PIPEs to target companies.
secure increasing concessions from SPAC sponsors, including those Once a sponsor has secured PIPE funding, the target company’s
working on mergers with the most appealing target companies. In valuation is set. With a traditional IPO, the price remains subject to
our experience, these concessions may include negotiating a lower market conditions up until the day the company goes public.
target valuation, a lower promote for the sponsors, or creative
structuring (for instance, by issuing shares to PIPE investors in the The Future of De-SPACs
form of convertible bonds, intended to hedge the downside). Far from viewing SPACs as another of those shooting stars
In all, the egregious examples that have drawn the headlines and that lights up the investment firmament only to flame out, we
driven away the quick buck should not obscure SPACs’ inherent believe they have a permanent place in the capital markets.
merits—or deter PIPE investment. We don’t view SPACs as a passing We expect regulation to close the loopholes, improve investor
fad. To the contrary, we believe that to ignore them entirely is to write sentiment and trust, and discourage lower-quality, speculative
off a significant and potentially promising area of the market. companies from pursuing the de-SPAC route, while enhancing
its appeal to higher-quality targets. We think this will lead to a
The SPAC process itself has come into its own over the last few more sustainable pace of issuance and a more attractive pool of
years, and in our view, the benefits in their structure that make de-SPAC opportunities.
SPACs increasingly competitive with traditional IPOs have proven
their worth in a range of situations (Exhibit 5): Looking ahead, we expect to see a bifurcation in the SPAC
market, a development that regulatory scrutiny should accelerate.
For private equity firms seeking an exit, SPACs can serve as an Reputable sponsors, in our view, will institutionalize the process of
effective way to de-lever their investments. raising SPAC capital, identifying acquisition targets, and executing
For family-owned and founder-controlled companies, on the opportunities. The combination of institutionalization,
SPACs can offer a partnership with a sponsor with a broad greater regulatory clarity, and the ongoing involvement of high-
institutional network and experience in public market quality target companies should work to enhance the long-term
disclosure and practices. viability of the de-SPAC process.
For corporates, simplicity, speed, and confidentiality of spinning And we anticipate that PIPE investors will continue to play an
off a business are key de-SPAC benefits relative to a lengthier essential role, providing surety of capital and deal validation.
and publicized IPO. In addition, for the foreseeable future, funding the significant
deficit of capital in the market will enable PIPE investors to
For young companies in search of capital to scale up, including extract valuable concessions in their pursuit of the most attractive
pre-revenue enterprises that may not be well known to the de-SPAC deals.
public, a SPAC can raise more than a traditional IPO. (For
pre-revenue companies especially, endorsement implied by PIPE
participation, and the due diligence it implies, can be vital.)
Exhibit 5
Our View of the De-SPAC Opportunity Set
Private Equity Exits Family-/Founder-Controlled Spinoffs Growth Capital
Cano Health UTZ Brands Bakkt Established Pre-Revenue
ATI Physical Therapy Billtrust Cerevel Proterra Archer
Paysafe United Wholesale Mortgage Ardagh Metal Packaging Benson Hill Lordstown
Simply Good Foods ChampionX SoFi Virgin Galactic
Open Lending AEye
Source: Lazard5
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.
Notes
1 Reuters, “US SPACs Overtake 2020 Haul in Less Than Three Months,” 17 March 2021
2 The ETF owns both pre- and post-deal SPACs.
Important Information
Originally published on 26 May 2021. Revised and republished on 9 June 2021.
This document reflects the views of Lazard Asset Management LLC or its affiliates (“Lazard”) based upon information believed to be reliable as of the publication date. There is no guarantee
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