Going public: SPACs offer a capital raising alternative for private companies

11/10/2020

As private companies ponder different ways they might take their companies public, more of them are considering Special Purpose Acquisition Companies, or SPACs. A SPAC is a company created exclusively for the purpose of raising capital through an initial public offering (IPO) to buy another company.

Typically, investors – or sponsors – with expertise in a certain industry form SPACs to pursue deals within that industry. A SPAC has no other real purpose; it does not maintain the business operations of a private equity or other investment firm, and all funds raised are earmarked to complete the intended acquisitions. Importantly, a SPAC has roughly a two-year time frame to complete an acquisition or face liquidation, in which case all proceeds would be returned to investors.

So, what does that mean for management teams interested in raising capital? It means that there is alternative route to an IPO that will enable them to access the public markets. Compared to a traditional M&A transaction, a SPAC process can add up to 20% to the sales price. When the process is complete, the management team will likely be retained to lead the surviving public entity. Moreover, SPACs give business owners a much quicker IPO process under an experienced partner while lessening any market sentiment volatility that could impact the pricing of a traditional IPO.

SPACs have grown significantly in both number and size over the past seven years, raising billions of dollars.

Source: SPACInsider

It’s likely that, for the foreseeable future, SPACs will remain a viable alternative to the traditional IPO. As access to capital continues to be an issue for private companies, and while investors look to put their dry powder to work, SPACs are perceived to be an important new home for both groups.

While a key benefit of raising capital through a SPAC is its advantageous terms, the decision to utilize a SPAC is a complex one that requires significant analysis. Contact our team or your trusted advisors for help identifying your best path forward.

"Our private company clients have seen growing interest from SPACs who are searching for a target. Historically, SPACs focused on emerging industries like technology and biotech, but recently we’ve seen them approaching hospitality, consumer and manufacturing companies as well." - Cindy McLoughlin, CPA, Managing Partner, Consumer, Hospitality, and Manufacturing Industries

Claudine M. Cohen, Managing Principal, Transactions & Turnaround Advisory

646.625.5717

Cindy McLoughlin, CPA, Managing Partner, Consumer, Hospitality, and Manufacturing Industries

516.336.5510

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_{This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}