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Interest in Special Purpose Acquisition Companies (aka, SPACs) has reached fever pitch as new backers jump into the market and regulators begin looking more closely at the deals and their structures. I recently hosted a wide-ranging, highly informative Risk Strategies webinar featuring EarlyBird Capital Chairman of the Board, and original SPAC innovator, David Nussbaum; former SEC lawyer and current partner at Holland and Knight, Bradley Houser; and XL Insurance Senior Vice President Justin Gilmore. The session covered a lot of ground - examining the current SPAC environment, evolving deal structures, participants, and risks, as well as important federal regulation changes.
You should definitely check out the full recording here, but here’s a quick overview of key takeaways.
The market, while slowed, is still moving fast
That hypersonic acceleration of the SPAC market has cooled in recent weeks. David Nussbaum estimated deal rates had slowed from at least 25 per week in January/February to a fifth of that figure. He said he expect the rate to move higher again in coming months, likely 7-8 per week, but not returning to the January-February highs.
Reasons for the slow down and lower are manifold, but David said a fundamental issue was the sheer volume of deals and the availability of target companies. SPAC targets, he noted, are typically private, $1b+ companies at least nominally positioned to go public and willing to do so. There are only so many of those to go around.
New, higher quality funders are entering the deal stream
Even as the market takes a breather, new funders are stepping into the picture. Early SPAC backers came largely from the hedge fund world, David explained, while newer arrivals include venture capital firms, top mutual funds, and other more mainstream investment companies. These new arrivals bring distinct benefits to the SPAC arena, including a better ability to identify and work with promising target companies that can bring stronger performance in their IPO, as well as adding higher quality expertise to the boards of these firms.
In this maturing environment, he said, backers are looking first at SPAC teams with access to proprietary, less competitive target sets. This, David explained, is driving interest in emerging markets, as well as in SPAC teams that can more easily attract capital and have public market experience to help ensure target companies will perform as needed in their IPO.
Regulators are taking a closer look at disclosure rules and deal structures
With potential for large returns, fast deal timelines, and a highly competitive market for deal making, disclosure rules are getting a revisit. Bradley outlined key aspects of Disclosure Guidance: Topic No. 11 issued by the Securities and Exchange Commission (SEC) in December of 2020, noting its emphasis on the need for fulsome disclosure of possible conflicts of interest among the sponsor team, clear explanation of sponsor investment benefits, and deal timeline pressures on the sponsors.
Bradley also noted that the SEC’s Enforcement Division recently sent letters of inquiry to a number of deal underwriters asking them to voluntarily provide the agency with information on how they are managing the risks inherent in the deals.
Insurers are evolving D&O coverages as deal structures change and lessons are learned.
Justin from XL Insurance covered important ground on coverage considerations. He explained that the biggest D&O exposure coverage can address centers on conflicts, real and perceived. The ability in SPAC deals to benefit from deals whether or not they are ultimately successful can, Justin said, create an incentive to do “any deal” and has the potential to trigger claims against management from participant who don’t benefit. Policy language can get granular, he noted, with the definition of terms like “affiliate” often crucial for determining if a claim will be covered.
He also noted that so-called “serial” SPAC sponsors, those with multiple active SPAC deals in flight simultaneously, are focus concern for underwriters. Allegations of conflict and favoritism can quickly lead to claims that spread across the portfolio of deals and involve highly detailed aspects of the deal structures.
There’s a ton more valuable information to be gleaned from the Webinar, so I highly encourage you to click in and watch it all.
If you have questions or want to connect on any issues or topics we discuss, reach out to me directly: NKrauter@krautergroup.com