Last year was the most significant year in the history of special purpose acquisition companies, or SPACs. More than $83 billion was raised across 248 SPACs in 2020, according to SPACInsider — more than the entire prior decade combined.

Los Angeles saw some of the nation’s most significant SPAC deals, such as Diamond Eagle Acquisition Corp.’s merger with sports betting company DraftKings Inc., and a record-setting $16 billion SPAC merger with United Wholesale Mortgage backed by Gores Group.

Strong public markets and a Covid-aided tech boom came together to make this series of wins possible. 

Now, SPAC managers will need a particular set of skills and attributes to succeed. Local SPAC managers and industry watchers say reputation and strategic expertise will play central roles in determining who succeeds and who fails.

SPACs, also called blank-check companies, are shell businesses created to raise funds through an initial public offering. They are primarily investment vehicles and have no operations of their own. Once managers have sufficient funds committed from both public and private sources, they use the capital to acquire a target company and take it public through a reverse merger with the SPAC.

Although the SPAC approach has existed for decades, it was — prior to last year — a highly niche sector of the finance ecosystem. The reasons behind SPACs’ rapid rise to prominence are many and varied, but most agree that the strength of the stock market and the ongoing outperformance of technology companies have played key roles.

“You have an effervescence in a desire to go public, which just happens during a tech boom,” said Gerard Hoberg, a USC professor who studies mergers and acquisitions. SPACs’ structures are, according to Hoberg, uniquely suited to address this demand.
“(Initial public offerings) traditionally require a lengthy process,” Hoberg said. “It’s long, information heavy and costly due to the underwriting costs.”

According to Hoberg’s research on the business effects of going public, technology companies with less developed product markets stand to lose the most from these lengthy public disclosures. 

Their offerings, Hoberg said, tend to be vulnerable to both domestic and foreign competition — particularly when they have exposed detailed views into their businesses through an IPO prospectus. 

SPACs do not require a prospectus. Instead, investors rely on the judgment of a SPAC manager to examine the inner workings of a company and determine its viability.

“This is just ideal fo r shareholders,” Hoberg said. “You want the company to realize full value. You want the manager to sit between you and the company on your behalf without the company having to share all its secrets. The ability to maintain your proprietary secrets and still go public is a major reason why SPACs are popular right now.”

A crowded field

SPACs’ unique features — and the healthy profits often made by managers — have led to an explosion of new entrants in the space. Most of these have yet to find an appropriate target company. Of the record 248 SPACs raised last year, 206 are still searching for deals, according to SPACInsider. 

“Raising a SPAC is the easiest part of it,” said Mark Stone, SPAC lead for Beverly Hills-based Gores Group.

While public investors will often readily hand over money to SPAC managers with a good pitch, Stone said the real challenge with a SPAC is locking down a strong deal.
Stone knows something about this, having secured the largest deal in SPAC history last fall. That transaction will see Gores Holdings IV merge with the nation’s largest wholesale mortgage lender in a deal valued at $16 billion.

These types of deals will only get harder to come by as the proliferation of SPACs drives up competition for high-quality targets. 

“There are so many SPACs, it is making it so that the good (target) companies have the power and can dictate terms to a significant extent,” said Jon Keidan, founder of venture firm Torch Capital. Torch is based in New York, but Keidan is active in the L.A. market and is an investor in a number of local companies such as Boosted Ecommerce Inc. and Sweetgreen Inc.

“The more I speak to (company) founders,” Keidan said, “the more reputation and expertise comes into play.”

Stone agreed that these are two key ways SPACs can stand out from the crowd. He added, however, that the type of expertise most valuable in the current SPAC market is different from past SPACs.

In-the-weeds operational knowhow was a defining feature of many traditional SPAC operators. According to Stone, a company needing this kind of intervention was as likely to be a red flag as a sign of a good business opportunity. Today, Stone said SPACs touting sector expertise tend to offer strategic, rather than tactical, knowledge.

“The guys who are saying they bring operational heft are very senior,” Stone said. “They are bringing board-level expertise. They are bringing strategy, focus and putting talent in the right places.”

This approach resembles the playbook of another local SPAC giant. Over the last decade, former Metro-Goldwyn-Mayer Studios Inc. Chief Executive Harry Sloan has raised six Century City-based SPACs with fellow ex-media executive Jeff Sagansky. 

The most successful of these have been the most recent — a 2019 vehicle merged with DraftKings last year and a 2020 vehicle merged with mobile esports company Skillz Inc. in December. Although Sloan brought a long career of media expertise to these deals, his role was less tactical in these businesses than in his earlier SPACs. In a November interview with the Business Journal, he said Draftkings and Skillz already had great leadership at the time of the deals and cited this as an important factor in their subsequent successes.

This approach could help propel Sloan to another landmark deal this year. The SPAC magnate is looking to raise $1.5 billion for his seventh SPAC, dubbed Spinning Eagle Acquisition Corp. If it attracts the full target amount, it could be the largest SPAC IPO in L.A. history. 

Regulatory shakedown

For all the Sloans and the Stones in the SPAC field, there are many more SPAC managers with little to no experience in the space. 

SPAC managers are usually required to return raised capital to investors if they don’t lock down a deal within two years. If this happens to a large number of the current SPAC cohort, or if managers push through subpar deals, USC’s Hoberg said, new regulations could tighten down on the space.

“If this boom becomes a fabulous bust, and a lot of SPACs do bad deals or return capital, a lot of investors will be mad about it,” Hoberg said. “Some might sue. Then the (Securities and Exchange Commission) might perk up and could enact stricter regulations, possibly requiring more disclosure.”

To Stone, this wouldn’t necessarily be a bad thing.

“A lot of people think of regulation as something that stops a momentum,” he said. “I don’t think it’s that at all.”

Stone said additional disclosure requirements from the SEC would force SPAC managers to perform at a higher level, driving a “flight to quality.” This change could help firms like Gores, which, according to Stone, compete on the basis of their strong track records and the ability to offer certainty of capital and proceeds to the target company.

Torch’s Keidan agreed that while the current SPAC boom could end in a regulatory clampdown, investors and managers could be better off for it in the long run.

“We’ll have some horror stories out of this,” Keidan said, “but it will make for a better environment.”

Keep reading the 2021 Money Issue.