Happy Friday, everybody!
I don’t know about you, but a year ago today was the last time I stepped into our Midtown offices in Manhattan (not that I’m counting). Pretty surreal! Fingers crossed for more off-camera interactions in the months ahead.
Now, to the news…
SPAC’d: I’ve lately had a number of conversations in which one repeat comment (or complaint, for some) is made: Everything is going public and there’s nothing of scale to buy!
Okay, that might be a slight exaggeration, but investors at larger funds do say that amid the flood of SPACs and IPOs, it’s unquestionably more competitive. With the robustness of the SPAC market and IPO market, many companies are leaping forward, surpassing the secondary sale, and going right to the public markets.
If you’re private equity, how do you compete with the valuations we’re seeing in the public markets? (To be fair, I’m mostly talking to healthcare dealmakers, where I focus my time.)
“For the bigger sponsors, those [target] assets are all kind of flipping in to the public markets, so there is a scarcity of assets; it’s forcing them to go downstream into the middle market or lower middle market,” one source said.
Similarly, sponsors have gone down market to build companies at times when asset prices were so frothy in recent years. “The irony: everyone is raising bigger and bigger funds,” the source noted.
While this is one strategy, I’m still wondering, will the business model fundamentally change for some sponsors should the public market party persist? If you’re PE, do you now have to give more economics to that superstar CEO you’re recruiting or investing behind to deter them from joining the SPAC craze? After all, for SPAC sponsors, the economics of the 20 percent promote is a pretty attractive selling point.
As another source recently pointed out, there are some multi-billion-dollar funds led by small industry teams across the overall firm. Do these models start going the way of those the likes of Warburg Pincus, which has a whole host of “Investment Support and Operational” resources that focus on anything from business process optimization to go-to-market optimization. In other words, will firms do more to create “value-add” for their portfolio companies and bring additional resources to bear?
To be fair, the longer-term performance of the class of 2020 and 2021 SPAC mergers has yet to play out.
In Bain & Co’s recently published Global Private Equity Report, the consultancy studied 121 SPAC mergers from 2016 through 2020 – comparing their end-to-end performance (pre- and postmerger) to equivalently timed investments in the S&P 500 through January 25. Bain concluded that more than 60 percent of the 121 have lagged the S&P 500 since their merger dates, with 50 percent trading down postmerger.
“Whether SPACs persist or flame out will surely hinge on performance. Increasingly, that will depend on whether professional managers can come to dominate the battlefield. As the incentives shift from short-term dealmaking to longer-term performance, the game is changing. The edge will go to sponsors who can screen the best targets and underwrite the most compelling value-creation plans,” the report said.
Bain also acknowledge that “sponsors trying to capitalize on long-term incentives need to assemble the right team, align around a value-creation hypothesis predeal, and then work closely with management (and outside help when needed) to structure and implement the right value-creation initiatives, building an equity story that resonates in the public markets.”
Doesn’t sound all that different to a private equity playbook. What are your thoughts on how the hot public markets will impact deal sourcing and strategy for PE? Hit me up at firstname.lastname@example.org. Have a great weekend!