PitchBook News - PE faces a SPAC regulator showdown

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The Weekend Pitch

April 18, 2021

Presented by RBC Capital Markets

Welcome back to The Weekend Pitch, dear readers. Adam Lewis here. Yes, I'm back after a few weeks away working on my lagging short game and non-existent tan. And I'm here to talk SPACs, which have begun to falter after an unprecedented boom.

If you want to chime in with thoughts of your own, feel free to hit me up on Twitter at @AdamLewisPI or email me at adam.lewis@pitchbook.com. Let's get right to it.

Longtime Wall Street critic Gary Gensler was recently named SEC chair. (Chip Somodevilla/Getty Images)

The SPAC market has cooled considerably in recent weeks, with companies that went public by merging with a blank-check entity trading well off their highs, and a growing number of regulatory hurdles emerging for an investment strategy that often dominated financial news headlines in 2020.

The drama is almost certain to impact the private equity industry.

Earlier this week, the SEC announced that a number of SPACs have misclassified warrants sold in IPOs as an equity rather than a liability, marking the latest sign new SEC chair and longtime Wall Street critic Gary Gensler plans to keep a watchful eye on what has become one of the industry's favorite investment strategies. In the meantime, blank-check IPOs have essentially come to a halt as investors await further guidance.

What does that mean for private equity?

On the one hand, PE firms have used SPACs to take companies public for several decades. The Gores Group, a Los Angeles-area firm run by Alec Gores, was an early adopter of the strategy. And industry heavyweights including Apollo Global Management, KKR and Bain Capital have all recently registered SPACs of their own, with Apollo filing to raise $400 million for its latest blank-check company last month.

Earlier this week, Altimeter Capital, an investment firm specializing in growth-stage VC deals, agreed to acquire Grab, a Singapore-based ridesharing and delivery company, in a reverse merger with its blank-check entity, Altimeter Growth. The deal gives Grab a pre-money valuation of around $35 billion.

Indeed, PE firms have played a starring role in the SPAC frenzy, with proponents touting the advantages of being able to sidestep the laborious, costly IPO process to take a company public and easing the burden of finding new buyers for portfolio companies. New regulations, however minimal, will likely be met with disdain by some.

But SPACs have also threatened PE deal flow, with multiple bidders driving up asset prices. Limited partners have also raised questions about possible conflicts of interest when private equity firms opt to sponsor their own SPACs, according to PitchBook's latest US PE Breakdown Report. Earlier this year, PIPE financing reportedly collapsed for a deal in which Vista Equity Partners tried to merge a trio of its portfolio companies with a SPAC sponsored by Apollo.

Limited partners have also wondered why private equity firms have chosen to do SPAC deals, rather than use flagship funds to back those acquisitions, expressing concern that their management fees are going toward deal team salaries.

In other words, a SPAC pullback could ease investor concerns and diminish the number of competitors for a finite number of targets. Both would be positive developments for PE.

Plus, critics of the lack of oversight for SPACs have grown louder over the past few months after a pair of companies that went public via SPACs—Clover Health and QuantumScape—were accused of misleading investors in reports from research firms Hindenburg Research and Scorpion Capital, respectively.

The string of negative headlines over the past few weeks has interrupted the SPAC market. But that could end up helping private equity firms if they stay away from what might prove to be a blank-check bubble.

Private equity has already devoted millions to clean up its image after its role in a series of high-profile bankruptcies over the past few years. Does it really want to double down on an investment tool that's already drawn the ire of regulators?

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What's driving growth in fintech and payments?

Valuations across the entirety of the tech sector are up. Financial technology has benefited disproportionately because COVID has proved to be the ultimate use case of several financial technology applications. Fintech provides stable, recurring growth and minimal downside.

As the quality of special purpose acquisition company (SPAC) sponsors has increased, so has the ability of SPACs to price growth potential in tech and fintech sectors.

Get the latest insights on what's propelling the growth of SPACs in the tech sector and future prospects for the use of SPAC vehicles.

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Quote/Unquote

"It's been really hard for investors to find returns in the public markets, both equities and credit, especially those that are focused on looking for yield. We're finding more and more investors shifting a larger percentage of their investment portfolio to alternatives."

—KKR co-president Scott Nuttall speaking during the firm's annual investor day

Datapoints

Nontraditional VC investor participation is at an all-time high when it comes to deal value, driven in part by late-stage deals, according to the latest PitchBook-NVCA Venture Monitor.

Deal flow

(artisticco/Getty Images)

Autonomous tech companies had a heckuva week, with big money backers jostling to get on the cap table of the next big thing in mobility, and the stock market recording a historic first.

TuSimple was valued at around $9 billion in its IPO, becoming the first dedicated self-driving vehicle maker to chart that path. A confluence of tailwinds, from safety concerns to driver shortages, is expected to hasten the deployment of autonomous trucks on public roads.

Walmart and others joined the funding frenzy for GM-owned Cruise, boosting the driverless carmaker's latest round to $2.75 billion and valuing it at $30 billion. Walmart and Cruise are developing a pilot program for driverless deliveries in Phoenix.

Best of the rest: Startup Groq hauled in $300 million to create semiconductors for use in self-driving vehicles, datacenters and other areas. Scale AI, which makes data-tagging tools utilized in self-driving research, was valued at a reported $7.3 billion after raising $325 million. And autonomous flight startup Xwing (great name) raised $40 million at a $400 million valuation and successfully flew a commercial cargo plane from gate to gate—an industry first.

Did you know ...

… That 84.8% of deals in the financial services sector during 2020 were add-ons? Read more in a spotlight of the industry in our recent analyst note exploring trends in add-on acquisitions.

The Chatter

Early in $FB (2007)
Early in @warriors (2011)
Early in #Bitcoin (2012)
Early in $AMZN (2014)
Early in $TSLA (2015)
Early in #SPACs (2017)

What's the pattern?

Prioritize non obvious, well reasoned decisions that, if right, will refute conventional wisdom.

—Tweet from Chamath Palihapitiya, founder and CEO of Social Capital

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PitchBook News - PE faces a SPAC regulator showdown

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Datapoints

Deal flow

Did you know ...

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