SPACs Bring More Opportunity — And Competition — To The Private Equity World

The explosion of SPACs in the last year has increased competition for private equity to find more traditional buyout targets, but also likely presents more opportunity and a quicker route to capital for those firms.

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Private equity has shown an increasing appetite for technology and VC-backed companies in the last decade. Last year alone saw at least 127 such deals, per the Crunchbase dataset, including Thoma Bravo’s purchase of RealPage for $10.2 billion, Blackstone Group’s acquisition of Ancestry for $4.7 billion and Vista Equity Partners’s purchase of Pluralsight for $3.5 billion.

Even with robust deal flow, private equity firms such as Apollo Global Management, TPG Capital and others have raised billions of dollars in the last year and a half sponsoring SPACs — special purpose acquisition companies — looking to take advantage of the now in vogue phenomenon in which a shell company goes public first with the intent to acquire a private company to put in its shell.

A recent study by the law firm Sidley reported 69 percent of private equity firms expect to be involved in SPAC-related transactions in the next year.

“I don’t think it’s going to change the playbook” for private equity firms, said Patrick Galley, CEO and CIO of RiverNorth Capital Management. “I think it’s just another arrow in their quiver.”

Increased competition, new opportunities

The popularity of SPACs, also called blank-check companies, has soared in the last year. While 2020 saw 248 SPACs go public, raising $83 billion, this year already has recorded 298 SPAC IPOs, garnering $97 billion, according to SPACInsider.

That means since the beginning of last year there are nearly 550 shell companies hunting a merger target with $180 billion to spend.

Despite all that capital and competition, Bill Nelson, a partner in the capital markets practice at Shearman & Sterling, said private equity often focuses their traditional buyouts in industries that are not currently being favored by the public markets, but still have strong fundamentals — looking to find a disparity between its valuation of a company and the public market valuation.

SPACs also provide some new opportunities for many firms. Instead of taking up to a year to raise a new fund and waiting several more years to deploy the capital and even longer for liquidity, Nelson said private equity firms may see sponsorship of a SPAC as a quicker way to a liquidity event.

Doing such can be highly profitable, since the sponsor’s shares can be about 20 percent of the SPAC’s size after the deal is complete.

Ideal targets for SPACs and private equity also can differ — lessening some of the competition for deals — as SPACs eye acquisitions that can appeal to the public market.

“Often, companies that don’t have a great IPO story are traditional buyout targets” for private equity, said Ran Ben-Tzur, a partner at law firm Fenwick & West.

Finally, SPACs can provide another potential acquirer to buy a company in a firm’s portfolio. Late last year, the SPAC Apex Technology entered into a definitive agreement to acquire Sixth Street-backed AvePoint.

However, it is important to note a private equity firm that sponsors a SPAC cannot create that SPAC with the sole intent to acquire one of its own portfolio companies. Such a deal produces a conflict of interest as a target cannot be in mind when the sponsor is raising money for the SPAC.

Going the VC route

While SPACs just provide another creative vehicle for private equity, Ben-Tzur points out those firms have always been adaptable.

Many firms such as Wellington Management and Insight Partners long ago started to blur the line between venture capital and private equity, and more could start to look at late-stage growth companies in technology as competition gets more fierce all over the market.

“We’ve definitely seen an evolution of who invests in technology in the last 10 years,” said Ben-Tzur.

David Weisberg, a director at investment bank and advisory firm Stout, agreed that more mature VC-back companies could attract private equity’s eye as dealmaking heats up.

“I think that is definitely possible,” he said. “There are a finite amount of acquisition targets.”

Illustration: Dom Guzman