Reimagining SPACs — Asking the right questions
Does the sheer volume of SPACs hitting the market right now keep me up at night? Of course! In 2020, SPACs have accounted for half of the IPOs. Yes, it’s a ton. However… Volume of new SPACs alone isn’t a symptom or diagnosis of pending catastrophe. The real questions we should all be asking and solving for are …
- Are SPACs economically viable for all parties involved? Are they creating true value?
2. What are the real and central benefits and flaws of the SPAC structure?
3. What makes a good SPAC great?
4. Can “complex” SPACs be properly explained in bite-size pieces to everyday investors?
5. How can economies of trust be created on the foundation of SPACs?
These are important questions — We debate, we strategize, and we solve for these on every deal we embark on.
As Sponsors representing a progressive Private Equity firm with a mission to contribute to the betterment of humanity, we believe that SPACs, when structured properly and backed by the right management team, can absolutely be viable. They can also help democratize the process of investing and bring the necessary capital and expertise to innovative, high-growth businesses — the essential growth agents in any economy.
Here are some key points to consider as you think about the above questions and formulate some of your own…
1. The Sponsor’s “Promote” can be designed as a tool for empowerment and alignment of the best interest of all parties involved. Generally speaking, SPAC Sponsors receive compensation for their time, work, and investment through what’s called a “promote” … around 20% of the post-IPO equity at minimal cost. Being transparent about this is a good thing. The “promote” does not automatically make SPACs a get-rich-quick scheme that benefits the Sponsor at the expense of the non-redeeming shareholders by default. Yes, we consider the potential dilution imposed by the promote and by the rights and warrants issued to redeeming shareholders on to the non-redeeming ones. Additionally, we invest our own capital along with our investors, so that we are on the same side of table as them. We make the economics work such that our Sponsors shares, the underwriting fees and other expenses incurred by the SPAC do not create unfair or excessive dilution. We make the economics favorable for all as we monitor the risk of dilution for non-redeeming shareholders.
2. I believe “Operator-Run” SPACs are the key. “Operator-Run” means that the SPACs are led by seasoned operators — not solely by investors. By deploying the “operator’s edge” throughout the deal cycle, such SPACs are designed to outperform the others. As cited in the McKinsey study published just 6 months ago (Earning the premium: A recipe for long-term SPAC success) the one key to SPAC success was: SPAC leaders with an operational edge. “One year after taking a target public, operator-led SPACs traded about 10% higher than their sector index and much better than other SPACs — a premium of about 40%. Operator-led SPACs behave differently from other SPACs in two ways: they specialize more effectively, and they take greater responsibility for the combination’s success.” Well designed and well run SPACs have performed well post-merger as a public entity with more closes, fewer liquidations, increased sizes, and more well-known participants. Certain SPAC Sponsors can and do deliver better performance than others. Outperformance matters to us! The Sponsor promote grows larger with outperformance, so we are on the same page as our fellow investors. It has also been found that the mean high quality SPACs have had a positive return relative to the Russell 2000 over the 12-month horizon.
3. Another key point is that the investor has a voice and a choice! The investor in a SPAC must vote to approve any deals. Rejections can certainly happen, although they are rare. And Sponsors are always aware and sensitive to the investors who choose to redeem vs participate. Good deals that are beneficial to all make a big difference — they help build strong reputations and generate greater trust, which in turn leads to more repeats and the opportunity to continue the investing and growth cycle.
4. Did you know that SPACs have a higher regulatory burden than IPOs? Some claim that SPACs enjoy an advantage, relative to an IPO, in that they face a lower regulatory burden, thereby making it easier for companies to go public. That is simply not true. In fact, SPACs are actually treated a bit more strictly regarding Sarbanes Oxley compliance compared to firms going public via traditional IPOs. Additionally, companies that go public through a SPAC are registered with the SEC and the SPAC is continually presenting to prospective investors in order to raise capital to replace the capital of redeeming shareholders.
5. I also believe there is much more transparency and access to information for the investor than a traditional IPO. SPACs can raise funds through private placements, and their investors have greater visibility to data and forward-looking analytics about the target company.
6. The competitive SPAC market is helping reduce costs as compared to a traditional lPO. We, for example, work closely with our underwriters to secure very competitive and attractive rates on the underwriting fees for our SPACs relative to the typical 5% to 7% of an IPO.
7. Access to quality IPOs has always been an issue. SPACs can change that. Our SPACs are structured such that accredited retail investors can access and make private equity-like investments without having to pay the fees associated with private equity funds.
8. Another important consideration is of course diversification. One way to achieve it is by investing in multiple SPACs with varying investment theses and industry targets. To enable diversification and to reduce the cost and price of entry, we have structured a parent or feeder SPAC, which is like a portfolio with multiple tranches. This feeder portfolio can invest in one or more SPACs. This design not only gives our investors the power and benefits of traditional Diversification, but it also allows us to waive steep minimums and offer the public greater access and democratized opportunities to those investors who intelligently don’t like to put all their eggs in one basket and desire to spread their risks across a variety of our SPACs.
From Sponsors to Investors, a great SPAC can:
⁃ Achieve alignment.
⁃ Line up motivations and incentives.
⁃ Share successes.
“Done well, SPACs combine the best of private and public ownership.”
— McKinsey, 2020
About BURKHAN WORLD INVESTMENTS and V4 Capital:
“WE AMPLIFY THE GENIUS OF OTHERS.”
We are a progressive upper mid-market Private Equity firm with Heart. Over $7.5B in capital raises, 20 portfolio investments, and over $22.5B in total enterprise value transactions. We invest in and guide innovative companies that bring revolutionary technologies and experiences expected to transform the world and our future. Our humble stewardship of capital along with our service leadership of businesses we invest in adds value to our investors, grows companies, and brings long-term positive impact to the world — beyond success and consumption.
Our 4 Vs are:
V 1) We try to leave the world better than we found it.
V 2) Every deal and every decision we make is baked in compassion, authenticity and integrity.
V 3) We extend healing wherever we find suffering in the business world.
V 4) We go beyond maximizing profits. We strive to contribute to the betterment of humanity.
Being big believers of long-term relationships and partnerships, we work closely with the management teams of our portfolio companies to up level their operational efficiencies and growth strategies. Additionally, we syndicate exceptional M&A and SPAC IPO opportunities and give access to institutions, fiduciaries, family offices, and accredited investors. Our goal is to connect the many dots to have the right investors meet the right opportunities. Diversity and innovation is so important to us that we diligently invest across the landscape of asset classes —Infra/Prop/FinTech, Media/eSports/eGaming, Alt Energy, Real Estate, Hospitality, BioTech, Blockchain and Cryptocurrency.
