How SPAC Takeover Financing Becomes Wall Street’s New Favorite Deal

For most investors these days, it’s literally a ‘PIPE dream’.

PIPEs, or private equity investments, are mechanisms for companies to raise capital from a select group of investors outside the market. But as PIPEs are increasingly being used in conjunction with an increase in SPAC mergers, a larger group of fund managers are seeking access to this security, with restrictions on who and how much can invest.

While SPACs, or special-purpose procurement firms, will utilize the public markets to raise capital to finance a future acquisition, PIPEs are allocated to a small group of investors. Managers of the funds participating in the PIPE will sign a non-disclosure agreement, with trade restrictions, and be brought across a proverbial ‘wall’, where they will receive material, non-public information from the SPAC on what target they are seeking to to acquire. They may then choose whether to invest at the IPO price of the SPAC, or sometimes at a discount, and to drive what they hope is a pop when the takeover is announced.

Bankers from several companies told CNBC that they had recently received an increase in incoming interest from investors looking for future PIPE opportunities.

“Many of these transactions performed very well and were well received in the period following the announcement,” said Warren Fixmer, who manages SPAC Equity Capital Markets at Bank of America. “The alpha generation he represents therefore attracts a wider group of investors.”

In 2020, PIPEs generated $ 12.4 billion in additional capital to help fund 46 SPAC mergers, according to data drawn by Morgan Stanley. Their data looked at SPAC which deals with valuations of more than half a billion dollars. Morgan Stanley says on average, PIPE capital has almost tripled its purchasing power. The data showed for every $ 100 million raised by a SPAC, a corresponding PIPE of another $ 167 million.

Some of the largest PIPEs have grown to $ 1 billion in recent months. The latest was announced Monday morning with the takeover of Fighty Trasimene’s Acquisition Corp. of Alight Solutions, which included a $ 1.55 billion private placement. Another Foley SPAC used a $ 2 billion private placement and announced in December that it was buying Paysafe. Chamath Palihapitiya’s SPAC, Social Capital Hedosophia V, uses a $ 1.2 billion PIPE to acquire SoFi. In addition, Altimar Acquisition Corporation announced an agreement with both Owl Rock and Dyal to offer the combined alternative asset manager with a $ 1.5 billion PIPE.

More dedicated PIPEs will leave the SPAC IPOs behind, meaning that if 2020 was the year of the SPAC boom, 2021 and 2022 will be the time when these vehicles merge.

Morgan Stanley data showed that there is still more than $ 90 billion worth of ‘dry powder’ to be used for acquisitions over the next two or fewer years. This implies that a total of $ 117 billion in PIPE capital is expected to be raised during the merger of SPAC, Morgan Stanley said.

Against this background, prospective PIPE investors are calling for placement agents en masse and want to be included in the financing of the mergers, bankers from three separate companies told CNBC.

The increased prevalence of this product raises concerns about the possible lack of understanding among the broader group of SPAC investors about how these investments work.

“There are two generic losers, or people at risk: the first is existing shareholders, but the second is the perception of the fairness of our capital markets,” said Harvey Pitt, former chairman of the Securities and Exchange Commission. “People who are not familiar with the disclosure, people who can not get the benefit of this price discount and people who do not know the power of their stock market downgraded based on what we call dilution. ‘

Investors in the PIPE usually receive their bonds at a discount at least against the market price, and sometimes they even get shares below the IPO price. About one-third of the SPACs in the 2019-2020 merger group that issued shares in PIPEs sold the shares at a 10% discount or more to the IPO price, according to a recent SPAC study by Stanford Law School and the New York University School of Law. This could ultimately be dilutive for investors who acquired shares in the IPO of the SPAC.

An important question, according to Pitt, is what type of disclosures investors in PIPEs receive compared to those of the broader market. While he notes that it would be ‘perfectly appropriate’ for the SPAC to share potential merger plans or things like that, other details about the company’s future could be a more gray area.

But proponents of PIPEs say they are a signal of validation for the market and that it could improve performance. The 2020 SPACs that included PIPEs, according to Morgan Stanley, achieved an average performance of 46 percent, one month after their deals were closed. Those without PIPEs achieved less than half (21 percent) in the same period.

But once investors in the PIPE are eligible to sell, it could put the total stock under pressure as it increases the float. This usually takes place in the weeks following the closing of a SPAC transaction – much shorter than the usual IPO lock.

Due to these factors, PIPEs may be an area that will receive greater regulatory scrutiny this year, as investors better understand the rules and potential financial impact surrounding these securities than the public shares in the SPACs.

“It’s not illegal to participate in any of these offers, but there are, shall we say, minefields through the process that transform the legal power into something that is illegal or crosses the line,” Pitt said said. the CEO of Kalorama Partners, a consulting firm. “Therefore, these transactions need to be investigated.”