Report: The long-term future of SPACs

Recent SPAC activity is raising concerns and questions around what constitutes a good merger. To unpack the issues, LTSE and Reid Hoffman of Reinvent Technology Partners facilitated an executive roundtable discussion to define the future of SPACs.We convened experts spanning SPAC sponsors and founders to former leadership at the SEC and capital markets counsel came together for an honest debate on the pitfalls and merits of SPACs, and the path forward for designing a long-term, company-focused SPAC. Here are some of the key takeaways.

• SPACs address a real need for alternatives to the traditional IPO. As one participant noted, there is a desire for a new vehicle to “democratize investment” and “disintermediate late stage VC.” SPACs offer an effective alternate path to raise capital, but companies choosing this route need to be careful about who they partner with, and how they signal their long-term commitment for the de-SPAC.

• SPACs are no passing trend—but the SPAC of the future will behave differently. SPACs will remain popular, but there will be growing pains as market participants learn to separate low-quality from high-quality SPACs. High-quality SPACs turn sponsors into long-term shareholders through mechanisms such as aligning compensation with company success (including time-vesting and price-vesting for the sponsors).

• Don’t underestimate the preparation for the transition to the public markets. The SPAC frenzy has led to more SPACs than viable targets, leading to companies getting thrown into the public markets only to be revealed via de-SPAC as unready. Recommendations ranged from adding even just a few extra weeks for preparation and diligence ahead of the merger, to building company boards with operators that bring a strong perspective on the industry.

• Benefits include forward projections and opportunity for direct investor engagement. SPACs offer a clear advantage for courting PIPE investors by enabling direct communication between companies and investors regarding the long-term growth model of the company. Investors appear to value this direct dialogue with management far more than third-party research.

In the weeks following this roundtable discussion, new developments signal a new era of SPAC is already on its way. Consumer brand-focused SPAC, Iron Spark announced last week they would operate without warrants, instead offering a dividend to investors. To get all of the insights from the discussion on the long-term future of SPACs, download our summary here.