Research Insights Target beware: Not all SPACs are created equal

Target beware: Not all SPACs are created equal

April 2022
Phocuswright Research

In 2020 and 2021, skyrocketing interest led to a flood of SPACs entering the market due to challenges with traditional IPOs, an abundance of startups seeking capital and eager investors. According to Phocuswright’s latest travel research article The Spectacular Rise (and Fall?) of SPACs in Travel, rapid growth has attracted backers ranging from reputable investors such as Thayer Ventures, Altimeter Capital and Lakestar, to celebrities including Jay-Z and Martha Stewart.

Travel companies considering a SPAC should carefully scrutinize the sponsors, investors and overall deal. At the positive end of the spectrum are sponsors with deep sector expertise who are committed to the long-term success of the companies they merge with. These SPACs include teams that continue to play a role in the company's development post-IPO, often contributing expert board members, and maintaining a vested interest in future performance. At the other end of the spectrum are sponsors with little sector expertise whose interest in the SPAC market is purely financial, with the IPO itself serving as the end-game.

Beyond intent, differences in the way SPAC deals are structured can have a substantial impact on the outcome. Factors to take into consideration include:

Founder (Sponsor) Shares: SPAC sponsors typically receive 20% of shares immediately upon closing. However, some deals are structured so that the sponsor share is locked up for a set period of time, or the sponsor receives a smaller share initially and then earns additional stock as the stock price increases. These variations can help ensure the sponsor has a shared interest in future performance.

Redemption Risk: SPAC IPO investors buy shares in a blank-check company without knowing which company it will ultimately acquire. To mitigate risk, SPAC investors have the right to redeem their shares at the purchase price plus any accrued interest at any point before the merger is complete, including after the target company is announced. A high redemption rate could virtually wipe out the money held in trust - and (fairly or not) erode the reputation of the target company.

Public Investments in Private Equities (PIPE): SPACs increasingly include PIPE investors who commit capital in exchange for discounted shares. PIPE deals (or lack thereof) can play a key role in determining whether the transaction can be completed, particularly in the case of a high redemption rate.

Valuation: While a SPAC enables a private company to work with the SPAC sponsors to negotiate its valuation upfront, a too-high valuation could result in a higher redemption rate and make attracting PIPE investors more difficult.

While SPACs with deep travel market expertise and a commitment to long-term growth offer a compelling value proposition, there are wide variations in SPAC quality, and overall, the category has underperformed. In some cases, sponsors and hedge funds, sometimes called the SPAC mafia (you can't make this stuff up), have reaped big rewards while leaving retail investors holding the bag. As the risks of going public via SPAC have grown, the model is increasingly drawing scrutiny from the U.S. Securities and Exchange Commission (SEC). Thus, in the current environment, even the best SPACs merging with high-quality private companies are often negatively impacted by turbulence in the broader market.

SPACs got hot on the promise of speeding up and simplifying the path to IPO. But while the approach has potential benefits over the traditional route, it has become clear over the past 12 months that the SPAC market has problems of its own. Read the full article to gain insight into the background behind the surge in SPACs, how deals are structured and which recent travel SPACs that have navigated the process with mixed results. It’s essential reading that highlights considerations for private travel companies evaluating whether to pursue going public via SPAC.

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