After rising explosively over the past two years, blank check companies have slowed down, as SEC noises and investor nerves weigh on deals. But in the US and overseas, the model of these blank check entities retains plenty of appeal, so wealth industry figures say.

Special purpose acquisition companies (SPACs) may have hit a downturn in the US in recent weeks amid regulatory rumblings, but they aren’t going away. And on the other side of the Atlantic, the market for these blank-check entities has plenty of potential, figures in the finance and wealth sector say.

US initial public offerings – important liquidity events that wealth managers track – surged in the first half of 2021 reaching $171 billion, beating the 2020 record of $168 billion (source: Dealogic). SPACs have fueled some of this rise. SPACs are created with the purpose of merging with a private company within two years of the listing. There has been some cooling in the past few weeks, however. 

In May, newly-appointed Securities and Exchange Commission chairman Gary Gensler said it was mulling fresh protections. He said the SEC is devoting significant resources to addressing emerging issues in a wave of traditional initial public offerings and SPACs.

Family Wealth Report has been told by many figures in the wealth, legal and corporate finance space that the SEC’s position, and some concerns about the sheer pace of SPAC activity, has created a bit of a lull.

“As the market begins to soften a bit you are going to have SPACs set up to engage in transactions where they have an incentive to find a target to acquire,” Jeremy Bressman, of law firm Kobre & Kim, said in a call.

“There may be a lot of SPACS that settle on targets that are not the best," he said. Bressman, who is based in Israel, represents clients in complex international and multi-jurisdictional disputes, including asset recovery, enforcement of judgments and arbitration awards, regulatory and criminal enforcement matters and cross-border investigations.

Yesterday, reports (Techcrunch, others) said digital media outfit BuzzFeed had announced that it was listing via a SPAC. BuzzFeed also said that it will be purchasing Complex, another media company, for $300 million in cash and shares in BuzzFeed itself; the SPAC deal will help finance its purchase of Complex. In another case, one of the most visible SPAC players on Wall Street is hedge fund rainmaker Bill Ackman, of Pershing Square Capital Management. Reports this week said that his SPAC agreed to buy 10 per cent of Universal Music from Vivendi. 

A number of banks serving high net worth and family office clients are active in the space, such as Citi Private Bank (see this interview here). We have also reviewed whether SPACs work in the RIA market, a busy area of M&A at the moment. 

Keeping it simple
US law firm Katten surveyed 100 investment professionals in May, and found that they were positive about SPACs, even though there has been a slowdown. Some 72 per cent of investors working in private equity, venture capital, hedge funds and investment banks, who have participated in a SPAC transaction, thought that SPAC IPO activity would increase through 2022. SPAC transactions are more popular than traditional IPOs because they offer a simpler and more flexible process, Katten said.

"Investors expect that the conditions that have fueled SPACs' growth over the last few years will continue to exist for the foreseeable future," Brian Hecht, a partner in Katten's New York office, said. "There will be some ups and downs along the way, including the relative slowdown in SPAC IPOs we're seeing now, for a variety of reasons, including some pullback from the stock market run-ups that SPACs had been experiencing, recent pronouncements from the Securities and Exchange Commission and perhaps just a perception that it's an appropriate time for the SPAC market to catch its breath after the frenetic activity in the first quarter. But it appears, more generally, that the momentum fueling the SPAC market is sustainable."

Katten said the industry thinks that SPACs offer a simpler process than standard IPOs. SPAC issuers have additional flexibility with certain disclosures in SPAC transactions compared with traditional IPOs, creating free space for SPAC target companies to tell their stories to investors - an advantage that 74 per cent of respondents cite for SPAC deals. That can be especially advantageous for early-stage companies in industries like technology and life sciences, which often do not yet have the established financial track records that IPO investors typically look for.