PSPCs went up, then went down, but they didn't come out

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In 2015, one of my smartest banking sources called in disbelief with advice on Aubrey mcclendon. The disgraced energy executive, who was being sued by his own company, had found a way to raise funds for a new venture: a special purpose acquisition company known as PSPC.

Rarely, if ever, has this source and I have spoken of SPACs, also known as blank check companies. At the time, most of Wall Street viewed these financial vehicles as tainted, a last resort for desperate traders who couldn’t find other ways to raise money.

SPACs were seen as circumventing the rigor and regulation of a traditional public offering, with characteristics unfavorable to small investors. This has given PSPCs a questionable reputation, which explains my source’s disbelief with the McClendon company.

We have come a long way since then. Over the past year or so, SPACs seemed to be losing track. More than 600 PSPCs have gone public since last July, when PSPC’s public offering market warmed significantly, raising around $ 200 billion, according to market tracker SPACInsider.

This is in part because top financial players like hedge fund manager Bill Ackman, investment banker Michael Klein and former Credit Suisse CEO Tidjane Thiam have turned into SPAC entrepreneurs. PSPCs became so fashionable, in fact, that they were popularized beyond Wall Street by celebrities like pop star Jennifer Lopez and basketball legend Shaquille O’Neal.

A SPAC, for the uninitiated, is a front company created by funders called sponsors. They raise money by going public in an initial public offering, or IPO, with the promise of merging with a real company – you know, the kind that makes things or provides a service – by two years from now. years. (If PSPC does not identify a merger target within this timeframe, it must return the money to investors.) The merger gives the target company the liquidity and stock market listing of the public shell, often with additional investment in the shell. time of the combination, making it a new public company.

But the big names, star power, and seemingly easy money that threw SPACs into such vogue last year have only given the deals a temporary air of legitimacy. Recently, the smelly smell that once lurked in PSPCs has reappeared, raising doubts about their longevity.

Actions of Lordstown Engines, which merged with a SPAC in March, have since widened the claims of a skeptical short seller led to a board survey of the inflated sales outlook promoted by its former chief executive. The electric vehicle company now faces a serious cash shortage and investigations from securities regulators and federal prosecutors.

The founder of Nicolas, another electric vehicle maker that went public through a PSPC, was recently charged with securities fraud. The exaggeration of the company’s capabilities and prospects is also at the heart of this scandal.

And Momentum, a space travel company that had planned to merge with PSPC, colluded with securities regulators in July for misleading PSPC sponsors about its technology. Gary Gensler, chairman of the Securities and Exchange Commission, said Momentus was a lesson in the risk of PSPC transactions – and the importance of sponsors and their advisers doing due diligence of merger goals.

Mr Gensler, who was confirmed in April, has made tighter SPAC regulations a priority. New guidance from his agency on how merged PSPCs should account for instruments called warrants, which can be converted into shares later, temporarily cooled the market in April and May as hundreds of PSPC sponsors moved. reassessed their approach.

The SEC is investigating at least a handful of PSPCs, including health technology company Clover Health and popular online betting site DraftKings, after questions have been raised about the accuracy of their disclosures and other issues . And critics continue to argue that the terms of most PSPC deals are bad for ordinary investors. Investors pursue after-sales services by increasing numbers, claiming that inaccuracies and omissions hurt the course of their actions.

Despite this, many PSPC funders – and investors – seem fearless. Although the pace of registrations has slowed, it is much higher than before the boom began last summer – 25 PSPCs went public this month, according to SPAC Research.

And because an IPO is only the first step in the life of a SPAC, there are still hundreds of blank check companies out there looking for merger targets. More than $ 100 billion in PSPC mergers were announced in July alone, according to Dealogic, making it the second-largest month on record in terms of dollars. At the time of this writing, 439 PSPC are still on the hunt for merger targets, according to SPACInsider, with more than $ 130 billion in the bank and the ability to add multiples of outside investments at the time of a transaction.

Monthly value of mergers involving SPACs

Nevertheless, a CNBC index of the biggest SAVS that announced a merger is down 32% this year. According to a Renaissance Capital study, two-thirds of the PSPCs that went public in 2021, most of which have not yet identified a merger target, are trading below their offer price. This increases the risk that early investors will buy back their shares at the IPO price and take their money back (with interest) after the merger is announced but before it closes, a unique feature of the PSPC model.

The takeovers, which have increased, leave a SPAC merger partner with less cash than expected. To compensate, PSPC sponsors may try to raise more outside funds to make up the difference or reduce the price of transactions to make them more attractive to investors.

Nonetheless, PSPC negotiators say they are confident that the market will resolve its current problems. “It’s a business that has matured quickly, and now we’re going to strike the right balance,” said Olympia McNerney, who heads the SPAC banking practice at Goldman Sachs.

Goldman has already launched two SPACs, and Ms. McNerney’s team has doubled in size over the past two years. Companies that go public through PSPC are as diverse as shared office company WeWork, digital publisher BuzzFeed and BBQGuys, the grill company backed by former football players Eli Manning and Peyton Manning.

Some PSPC sponsors are also trying to make the offers more attractive to family investors, including reducing the benefit sponsors get from stocks and warrants they get for next to nothing.

A PSPC sponsored by venture capital firm Ribbit Capital has issued shares to its first backers which cannot be sold until the shares of the merged entity reach a target price range, starting at double the IPO price.

And Mr. Ackman, whose initial PSPC transaction was scuttled by the SEC last month, had planned that the sponsors of its PSPC pay their mandates rather than getting them for free.

Mr. Ackman’s $ 4 billion PSPC, the largest of its kind, was sued this week, in a case which also calls into question the very nature of the SPAC model. A few days later, Mr. Ackman said that if regulators blessed a new vehicle he calls a SPARC (company specializing in acquisition rights), he would return the money to the SPAC investors and give them the right to buy into the new company, which he said improves the shortcomings of the PSPCs, namely by not locking in investor funds or imposing a deadline to complete a merger.

“If you find yourself in a leaking boat, it is often better to change boats than to fix the leaks to complete the mission,” Ackman said. tweeted.

Despite the innovations of a few, PSPCs remain risky for common shareholders. “The only reason someone would do a PSPC is because they found a sucker,” said Tyler Gellasch, executive director of the nonprofit Healthy Markets.

PSPC supporters say transactions are an effective way to raise public capital for growing companies while saving time and avoiding the hassle of a traditional IPO. There will be ups and downs, but PSPC mergers will become a common choice for some companies to go public. They also provide small investors with exposure to start-ups previously reserved for professionals, such as venture capitalists.

But the latest group of SPAC sponsors may soon discover that there are more than there are compelling companies to merge with. And as the two-year clock to close a deal runs out, by the end of 2022 many sponsors could return the capital they’ve raised to their investors with nothing to show. (A version of this arrived at the SPAC from Mr. McClendon, Avondale, which was shelved in late 2016, after Mr. McClendon’s sudden death.)

Mr. Gellasch believes that not all service is bad, but guaranteed sponsor compensation can reduce the incentive to seek out high-quality target companies, paving the way for poor results.

“It seems pretty clear that PSPC merger negotiations tend to follow three rules: don’t ask, don’t say, and don’t fight too hard,” he said. “It’s not a process that is likely to end with a lot of strong public companies or happy long-term investors.”

What do you think? Is PSPC here to stay or will the blank check businesses disappear? Let us know: dealbook@nytimes.com.



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Newsrust - US Top News: PSPCs went up, then went down, but they didn't come out
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