More and more companies are utilizing a special purpose acquisition company, or SPAC, to get listed on U.S. public markets, as an alternative to a traditional IPO. Anthony Okolie speaks with Anna Castro, Sr. Portfolio Manager, TD Asset Management, about how a SPAC may offer investors a unique way to get in on the ground floor of growth companies.
If you’re a private company needing capital to scale and capture a growing market quickly, going public through a traditional IPO may not always be the best way. And COVID-19 has been that route even tougher. More and more companies are now utilizing a Special Purpose Acquisition Company, or SPAC, to get listed on a US public market. And for investors, my guest says that these vehicles may offer a unique way to get in on the ground floor in new growth companies.
Joining me today is Anna Castro, Senior Portfolio Manager of TD Asset Management. Anna, how is the US IPO market doing? I mean, if you’re a major household name, such as Airbnb or Uber, the traditional IPO route could still be available even in COVID times, correct?
– Hi, Tony. Yes, so just to give you a perspective on the US IPO market, it was low through May. It only picked up around June. And so, if you’re a large private company that has the resources and a high brand recall, you could still do the traditional IPO. However, there are a lot of private companies that have growing businesses that could be interesting but have really been under stress because of the pandemic.
And a traditional IPO can take over a year and with great uncertainty in terms of the end result. And this is a very demanding and distracting process for a private company that’s already challenged by the pandemic.
– And the traditional IPO route has become increasingly challenged, as you mentioned, for many private companies that want to go public. And they’re doing it through these Special Purpose Acquisition Companies, or SPACs. Now, SPAC issuances have also doubled this year. So, how does a SPAC work?
– So, under a SPAC, a private equity firm raises cash from public investors with the goal of acquiring a private company to bring it to public. And they have a limited time period — usually for two years. Now, for the private company, because of the pandemic conditions, they are starting to be more willing to merge with a SPAC than they used to be more willing, mainly because SPACs provide a fast track IPO process to them. In addition, partnering with a private equity investor could also help enhance their growth prospects.
– And so, why should an investor consider investing in a SPAC?
– So, SPACs provide private-equity-like returns with downside protection. So, it’s a non-traditional investment that can help diversify the source of returns of a portfolio. So, first, in terms of the downside protection structure, when a private equity investor raises that cash, it’s put in trust. And the public market investor can vote when a deal is proposed to them.
So, if they don’t like the deal, if they don’t like the private company being acquired, they can actually vote to take their money back to redeem for cash. So, that’s where the protection is while the search is ongoing and the deal is being proposed.
On the flip side, there is also an opportunity to get early dips into growth and get private equity type of returns. A SPAC investor gets a common share as well as a sweetener, which is in the form of a warrant, an option to buy more shares at a specific price — fixed price in the future. So, you can really participate in the growth opportunity as the value appreciates.
– And of course, SPACs have been around for some time. In the past, they’ve had a bit of bad press. I mean, it wasn’t always as attractive for investors. It had very poor quality. So, what’s different about SPACs this time around that makes it a very compelling investment product for investors?
– So, you’re right — in the past decade, investor protection has improved. So, that’s the ability to vote when a deal is proposed and an ability to redeem your cash and get your money back if you don’t like it. So, that’s one thing that has changed in the past 10 years. However, in the past year, you’ve also had more of a better successful track record of the deals — better deals, larger, higher quality. And you’ve had an increasing number of high-profile private equity investors and experienced management teams come and lead these SPACs.
On the flip side, as I mentioned, because of the pandemic, there are more choices for target companies because private companies are more willing to transact.
– Can you give us some recent examples of some successful new companies from SPACs?
– Sure. So, the success has mostly been a US phenomenon. And in terms of the sectors, they’ve mostly been focused on the growth tech or industrial themes. Some examples of high-profile investors and some new companies that have risen 50-plus% – so Virgin Galactic has been one, a space tourism company. Another one is Draft Kings, which is online sports betting. Another one is Vertiv, which is a provider for data centers. And there’s also been a number of names more focused on electric vehicles or autonomous vehicles.
In terms of the SPAC side, issuance side, last month, you had Bill Ackman Pershing Square raise $4 billion, which is the largest ever for a SPAC.
– And we just have about a minute left, but how can I incorporate a SPAC of my portfolio? I mean, this is not something that an individual investor can do on their own, correct?
– Well, technically, an individual investor can buy these, because they trade under public exchanges. However, their access and their ability to analyze this could be limited to institutional investors. Let’s put things in perspective. With the pandemic, you have SPACs becoming an attractive, non-traditional source of returns. It has become more popular because of the opportunities opposed by this pandemic.
But one thing doesn’t change, and it’s just the value of due diligence. It’s still very important to remain selective. And for example, our team, we spend a lot of time meeting with management. We go through the various deals, the transaction, the valuation. We also look into the business of the new company and the growth plans. So, as market conditions change, there could be interesting structures that come up, both in the nontraditional side. What’s really important is to remain very focused and look at the total portfolio to have a holistic view and have the capability to invest in both traditional and non-traditional investments to improve the returns for the client and reduce risks.
– Anna, thank you very much for your time.
– Thank you so much, Tony.
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