Sponsors under pressure to boost SPAC alignment – Morrison & Foerster

Caution from the SEC, combined with the sheer number of SPACs in market, could prompt sponsors to recut or restructure their economics, the law firm noted in a webinar this week.

Sponsors of special purpose acquisition companies are under increasing pressure to boost their alignment with investors, according to law firm Morrison & Foerster (MoFo).

Speaking on a Wednesday webinar, New York-based partner Mitchell Presser said more caution from the US Securities and Exchange Commission, combined with the sheer number of SPACs in market, was pressuring sponsors to recut or restructure their economics.

Organisations raising SPACs typically receive between 20 percent and 25 percent of SPAC stock in return for sponsoring the vehicle, which involves stumping up a percentage of the amount targeted.

“We are seeing a good number of cases where the sponsors are increasing the alignment of their interest with the investors by saying I’ll take some of my economics and put them at risk,” Presser said. “And [they’ll] get them if and when the stock trades above a specified price above the $10 listing price: for example, $12.5 or $15.”

Greater alignment with investors brings SPACs closer to private equity in terms of manager remuneration, in which carried interest is typically only earned past a pre-agreed hurdle. Bain Capital, KKR and Apollo Global Management are among firms that have launched SPACs, while Hamilton Lane has said it may launch a dedicated business unit for the strategy.

SPAC activity globally skyrocketed last year, driven in part by include strong equity markets; covid-19 shrinking if not eliminating, at least temporarily, the window for conventional IPOs; increasing familiarity with SPACs; and the allure caused by fear of missing out, per affiliate title Buyouts.

Roughly $87 billion was raised across more than 300 SPACs in the first quarter of this year, already exceeding $75.4 billion raised by 247 SPACs in 2020, according to MoFo data. New issuance fell off a cliff in April, with just $2.8 billion raised across 13 SPACs.

The decline follows an April statement from the SEC arguing that some SPAC warrants, which give the right to buy a share of stock at a certain price and are traditionally treated as equity for accounting purposes, should be classified as liabilities, according to affiliate title Private Funds CFO.

It followed SEC guidance from late March reminding participants that SPACs are subject to shell company regulations; must abide by Exchange Act books, records and internal control rules; and when a SPAC is listed on a national exchange, the company must satisfy initial listing standards.

“In general, we’re seeing caution coming from a number of different sectors,” Presser said. “We’re seeing it come from the regulators, we’re seeing it come from the investors, and because of that we’re seeing a continued evolution of the SPAC.”

– This article was updated to clarify that Hamilton Lane has not yet launched a SPAC business line.