Sideline SPACs: Competing priorities?

It’s easy to explain the appeal of a special purpose acquisition company (SPAC). Raising the capital can take as little as two months. The disclosure requirements are much lower than for a traditional IPO. There is flexibility in target selection. And liquidity events happen immediately - once the merger with the listed entity is complete, everyone has shares that they can sell assuming there is demand for the stock.

The cherry on the top for the sponsor is a 20% equity interest in the SPAC once it lists for a nominal fee. This is essentially compensation for the costs incurred in establishing the entity – which they wouldn’t get back if no deal happened – and for leveraging their expertise to identify a target, execute a transaction, and contribute to the value creation.

But what if that sponsor is a partner with a private equity firm whose primary day-to-day duties involve generating attractive returns for investors in his funds? At what point do LPs get uncomfortable with the notion of portfolio GPs – or responsible officers – running potentially highly lucrative sidelines, even if there is minimal crossover with the funds in terms of investment remit?

There has been a noticeable shift in the profile and positioning of SPACs as they continue to proliferate in Asia. Last July, ACE Equity Partners became only the third private equity firm in the region to sponsor one of these structures directly, following New Frontier Group and CITIC Capital. The others tended to be launched by individuals with experience in the private equity industry but without a current employer or acting independently of it.

More recently, two SPACs have been established where the relationship between SPAC and private equity firm is explicit: Vickers Venture Partners and Olympus Capital Asia hold stakes in the sponsor entities through their funds. Each SPAC will have access to the relevant GP’s networks and expertise, and – in the case of Olympus – deal prospects, plus sourcing, diligence, and operational resources.

In situations where there is no portfolio level relationship, the prospectus language can vary. In the past couple of weeks, there has been SPAC activity involving three Chinese private equity firms: Ascendent Capital Partners, Primavera Capital Group, and Hopu Investments. In each case, the founder or CEO of the private equity firm has whole or partial ownership of the sponsor entity, yet the nature of the relationship with the GP differs.

Fenglei Fang of Hopu Investments has no direct role in the management of the SPAC he is sponsoring – perhaps because clearly there could be overlap between healthcare targets considered by the SPAC and Hopu’s funds. He is chairman of the advisory board. In addition, there is a formal relationship between the sponsor and Hopu, with the latter providing office space and administrative services, as well as access to its networks and relationships.

The Primavera and Ascendent SPACs are both looking to make global consumer technology investments with a China expansion angle. The Primavera entity emphasizes its connections to the private equity firm, not only noting that it will have access to the private equity firm’s track record and network, but also explaining in detail the relevance of that track record to the investment remit. The SPAC is described as an affiliate of the private equity firm.

Ascendent’s prospectus plays down these ties. The SPAC has no connection to the private equity firm’s name and a source close to the situation said that the founder would spend limited time on the project. Ascendent is not described as an affiliate of the SPAC.

There is language in each prospectus about potential conflicts of interest and what is being done to address them. Moreover, private equity firms normally brief LPs when they, or a senior team member, is involved in a SPAC. This might be enough to appease any concerns, but if investors see a growing number of portfolio GPs participating in the SPAC craze, closer scrutiny is to be expected.

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• Topics
• Fundraising
• IPO
• Asia
• SPAC