How SPAC financing of acquisitions became Wall Street’s new favorite trade

For most investors today it is literally a “PIPE dream”.

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

While SPACs, or special purpose acquisition companies, will tap into the public markets to raise capital to fund a future acquisition, PIPEs are allocated to a small group of investors. Managers of the funds participating in the PIPE will sign a nondisclosure agreement, with trade restrictions, and will be led over a proverbial ‘wall’ where they will receive material, non-public information from the SPAC as to what target they are. looking to acquire. They then get to choose whether to invest at the SPAC’s IPO price – or sometimes at a discount – and drive what they hope will pop when that acquisition is announced.

Bankers from several companies have told CNBC that they have recently received a surge in inbound interest from investors looking for future PIPE opportunities.

“Many of these transactions are performing very well and have been well received in the post-announcement period,” said Warren Fixmer, who runs SPAC Equity Capital Markets at Bank of America. “So the alpha generation it represents is clearly attracting a wider range of investors.”

In 2020, PIPEs generated $ 12.4 billion in additional capital to help fund 46 SPAC mergers, according to data from Morgan Stanley. Their data looked at SPAC deals with valuations in excess of half a billion dollars. On average, PIPE capital added nearly three times the purchasing power to the SPAC, Morgan Stanley said. For every $ 100 million raised through a SPAC, a corresponding PIPE added an additional $ 167 million, the data showed.

Some of the largest PIPEs have surpassed $ 1 billion and have been committed in recent months. The latter was announced Monday morning, with Foley Trasimene’s Acquisition Corp.’s acquisition of Alight Solutions, including a $ 1.55 billion private placement. Another Foley SPAC took advantage of a $ 2 billion private placement and announced a deal to buy Paysafe in December. Social Capital Hedosophia V, Chamath Palihapitiya’s SPAC, deploys a $ 1.2 billion PIPE to acquire SoFi. In addition, Altimar Acquisition Corporation announced an agreement with both Owl Rock and Dyal to disclose the combined alternative asset manager with a PIPE of $ 1.5 billion.

More committed PIPEs will lag behind SPAC’s IPOs, meaning that if 2020 was the year of the SPAC rise, 2021 and 2022 will be when these vehicles come together.

Morgan Stanley data showed that there is still more than $ 90 billion in “dry powder” to be used for acquisitions in the next two years or less. That means a total of $ 117 billion in PIPE capital is expected to be raised in connection with SPAC mergers during that period, Morgan Stanley said.

Against that backdrop, potential PIPE investors are massively calling on placement agents and wanting to be involved in financing those mergers, bankers from three different companies told CNBC.

The increased prevalence of this product raises concerns about the potential lack of understanding from the wider group of SPAC investors about how these investments work.

“There are two generic losers, or people at risk: the first is the 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 unaware of the disclosures, people who cannot take advantage of these price discounts, and people who are power of their shareholdings downgraded on the basis of what we call dilution. ”

Investors in the PIPE usually receive their securities at a discount of at least the market price, and sometimes they even get shares below the IPO price. About one-third of the SPACs in the 2019 through 2020 merger cohort that issued shares in PIPEs sold those shares at a discount of 10 percent or more from the IPO price, according to a recent survey by SPAC by Stanford Law School and New York University School of Law. That can ultimately be dilutive for investors who acquired shares upon the IPO of the SPAC.

An important question, Pitt said, is what types of information investors in PIPEs receive compared to that of the broader market. While he notes that it would be “perfectly appropriate” for the SPAC to share potential merger plans or similar matters, other details about the company’s future could be a more gray area.

But advocates of PIPEs say they serve as a signal of validation to the market and can therefore improve performance. Those 2020 SPACs with PIPEs had a median performance of 46 percent, a month after their deals closed, according to Morgan Stanley. Those without PIPEs saw gains of less than half (21 percent) over the same period.

But once investors in the PIPE become eligible to sell, that can put pressure on the total inventory as it increases the float. Typically, that takes place in the weeks after an SPAC deal is closed – much shorter than the typical IPO freeze.

Because of these factors, PIPEs could be an area to receive more regulatory scrutiny this year as investors begin to better understand the rules and potential financial impact surrounding these securities compared to public stocks in the SPACs.

“It’s not illegal to participate in any of these offers, but there are, shall we just say, minefields in the process that could potentially legally turn into something illegal or cross that line,” said Pitt, who is currently acting as the CEO of Kalorama Partners, a consulting firm. “That is why there has to be attention, and that is why there is attention for these transactions.”