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Special Purpose Acquisition Companies (SPACs)

Special Purpose Acquisition Companies (SPACs)

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none; background: #019BCC; padding: 9px 25px; border-radius: 25px; margin-top: 20px; display: inline-block; box-sizing: 1px; box-shadow: 2px 3px 0px rgb(0 0 0 / 16%) !important; } .cards-shadow, .cards-shadow2 { display: flex; justify-content: space-between; } .cards-shadow>div { background: #CCD5EB; width: 49%; padding: 20px; border-radius: 20px; box-sizing: rgb(0 0 0 / 24%) 0px 3px 8px; box-shadow: rgb(0 0 0 / 35%) 10px 3px 8px; position: relative; } .cards-shadow2>div { background: #CCD5EB; width: 32.5%; padding: 20px; border-radius: 20px; box-sizing: rgb(0 0 0 / 24%) 0px 3px 8px; box-shadow: rgb(0 0 0 / 35%) 10px 3px 8px; position: relative; } .content-defi.abstop { position: absolute; top: -22px; left: 0; background: #002D9C; color: white; line-height: 1; padding: 5px 15px; font-size: 35px !important; border-radius: 5px; } .col-3-st>div { width: 100%; } @media (max-width: 1000px) { .ptb-0 { padding-top: 0 !important; padding-bottom: 0 !important; } .sect1-blog>div { width: 100% !important; } .sect1-blog { display: flex; flex-direction: column; } .sect1-blog img { max-width: 100% !important; } .cards-shadow, .cards-shadow2 { display: flex; justify-content: space-between; flex-direction: column; } .cards-shadow>div, .cards-shadow2>div { width: 100% !important; margin-bottom: 40px; } .content-defi.abstop { padding: 5px 15px !important; } .max-min-100 { max-width: 100% !important; min-width: 100% !important; } .ps { position: static !important; } .last { margin-bottom: 0 !important; } .p20 { padding: 20px !important; } } </style> <div class="content-defi ps" style="margin-top:40px;"> <b>Part 1:</b> Is SPAC a better alternative to seek the benefits of public listing - at a lower price, and at a faster pace? </div> <p class="content-defi" style="color: #002D9C;margin-bottom: 0px;font-size: 24px !important;;"> <b>SPAC that, I got you a floor!</b> </p> <p class="content-defi">Imagine you are a start-up founder, who has crossed the valley of death. <br> You have successfully managed to turn your first idea into an MVP, with - </p> <br> <br> <div class="ptb-0" style="max-width: 800px;margin: auto;padding: 45px;border-radius: 20px;"> <div class="col-3-st"> <div> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4eded8c3322a43aee9_Asset%203%404x.png" alt="icon"> <p style="margin-top:16px;margin-bottom:0px;margin-right:0;margin-left:0;line-height:1.5;padding-top:0px;padding-bottom:0px;padding-right:10px;padding-left:10px;font-family: aktiv-grotesk, sans-serif;font-size:20px;text-align:center;font-weight:300;"> A steady annual <br> recurring revenue </p> </div> <div> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4fffb9bf86c3e36911_Asset%204%404x.png" alt="icon"> <p style="margin-top:16px;margin-bottom:0px;margin-right:0;margin-left:0;line-height:1.5;padding-top:0px;padding-bottom:0px;padding-right:10px;padding-left:10px;font-family: aktiv-grotesk, sans-serif;font-size:20px;text-align:center;font-weight:300;"> A well-defined <br> customer set </p> </div> <div class="last"> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4fa38ddc4062269bdf_Asset%205%404x.png" alt="icon"> <p style="margin-top:16px;margin-bottom:0px;margin-right:0;margin-left:0;line-height:1.5;padding-top:0px;padding-bottom:0px;padding-right:10px;padding-left:10px;font-family: aktiv-grotesk, sans-serif;font-size:20px;text-align:center;font-weight:300;"> Sufficient cash <br> in the bank </p> </div> </div> <br> <br> <div style="text-align:center;"> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4ed430b845bc41cd71_Asset%206%404x.png" style="width:70px;"> </div> <br> <br> </div> <div class="p20" style="background:#f7f5f3;max-width: 800px;margin: auto;padding: 45px;border-radius: 20px;"> <div class="sect1-blog" style="display: flex;"> <div> <img class="max-min-100" src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e5282dbbcad44c8c1ce_Asset%207%404x.png" style="min-width: 350px;max-width: 350px;"> </div> <div> <p class="content-defi" style="padding-left: 20px;">You were funded into your early stages by venture capital firms that have a reputation for spotting the right ideas and hand-holding you through that phase in your growth when the risks of your firm dying are the highest. </p> </div> </div> <p class="content-defi" style="margin-bottom:0;">Partly due to their networks and partly due to your own charisma, <b>you have attracted an unassailable talent pool that has come on board at affordable cash costs but with significant ESOPs.</b> <br> <br> All in all, <b>you are at the inflection point of your growth</b> – that early bend upward of the Hockey Stick curve. </p> </div> <br> <br> <div style="text-align:center;"> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4ed430b845bc41cd71_Asset%206%404x.png" style="width:70px;"> </div> <div class="sect1-blog p20" style="display: flex;max-width: 800px;margin: auto;padding: 45px;margin-top: 20px;"> <div> <p class="content-defi" style="padding-right: 20px;">The next challenge is to grow to a size where you can enjoy the efficiencies of scale and scope. <br> <br> You want to increase the standardization of some processes which were ad-hoc in the early part of your growth story, like: </p> </div> <div> <img class="max-min-100" src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e5136c33482ae906ce5_Asset%208%404x.png" style="min-width: 350px;max-width: 350px;"> </div> </div> <div style="text-align:center;"> <img class="max-min-100" src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e504751772cb2b50ca5_Asset%209%404x.png" style="min-width: 850px;max-width: 850px;margin: auto;"> </div> <br> <div style="text-align:center;"> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e4ed430b845bc41cd71_Asset%206%404x.png" style="width:70px;"> </div> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-bottom: 10px;"> <p class="content-defi">As your core revenue stream stabilizes, you are also at a stage where you can take bigger bets on the industry in which you are functioning, like - </p> <ul class="content-defi"> <li>Exploring foreign markets </li> <li>Trying to add greater value and stickiness by exploring adjacencies</li> <li>Bets on new technologies/business models of the future</li> </ul> </div> <div class="sect1-blog p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi" style="color: #002D9C;margin-bottom: 0px;font-size: 24px !important;margin-bottom: 15px;"> <b>All these endeavors require capital</b> </p> <div class="sect1-blog" style="display: flex;"> <div> <img class="max-min-100" src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e50a67f1d714b88f7c4_Asset%2010%404x.png" style="min-width: 450px;max-width: 450px;"> </div> <div> <p class="content-defi" style="padding-left: 20px;">The next challenge is to grow to a size where you can enjoy the efficiencies of scale and scope. <br>And for most startups at this stage, the best bet to raise funds at this scale is an IPO. </p> </div> </div> </div> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi" style="color: #002D9C;margin-bottom: 0px;font-size: 24px !important;margin-bottom: 15px;"> <b>But why are IPOs the best bet? </b> </p> <p class="content-defi"> <b>1. IPOs provide a bigger and more diversified base of investors to raise money from</b> </p> <div class="cards-shadow" style="margin-top: 50px;"> <div> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;">As per Preqin, despite having a <b>7X growth since 2002</b>, the amount of funds managed by private equity managers (including VC + PE) was about <b>US$6.3 trillion as of 2021 (McKinsey).</b> </p> </div> <div> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;">As per Bloomberg, we can <b>contrast</b> the same with the <b>global public equity market capitalization of US$122 trillion</b> over the same period. </p> </div> </div> </div> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi"> <b>2. Better liquidity for investors and employees</b> </p> <div class="cards-shadow" style="margin-top: 50px;"> <div> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;">A <b>public stock</b> means that a security is frequently traded and there is a dynamic price discovery on it. </b> </p> </div> <div> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;">This gives <b>both early employees and investors</b> an opportunity <b>to time when they wish to cash out and at what level.</b> </p> </div> </div> </div> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi"> <b>3. A currency for future acquisitions</b> </p> <div class="cards-shadow2" style="margin-top: 50px;"> <div> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;">A <b>publicly traded stock</b> acts, to a large extent, <b>as a currency</b> to acquire targets with <b>high synergies</b> through all-stock or part-stock deals. </b> </p> </div> <div> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;margin-bottom: 0;">Offering a <b>publicly traded stock</b> to a <b>potential acquisition target</b> becomes especially <b>lucrative</b> when <b>multiple competitors</b> are: </p> <ul class="content-defi" style="margin-top: 0;"> <li>interested in the same company (Salesforce’s acquisition of Tableau) or </li> <li>when similar-sized companies want to merge to acquire a larger share of the market.</li> </ul> </div> <div> <div class="content-defi abstop">3</div> <p class="content-defi" style="text-align:center;margin-bottom: 0;">Essentially it is <b>a signal by the company</b> that they are <b>offering the target company:</b> </p> <ul class="content-defi" style="margin-top: 0;"> <li>a stake at the table, and</li> <li>a transparent price discovery mechanism.</li> </ul> </div> </div> </div> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi"> <b>4. Risk aversion by Limited Partners to VC/PE Funds</b> </p> <div class="cards-shadow" style="margin-top: 50px;"> <div> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;"> <b>Institutional investors to VC and PE funds</b> have an <b>internal limit</b> to what <b>share of their total AUMs</b> can they <b>offer to such funds.</b> </p> </div> <div> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;">As per McKinsey and Statista, as of 2021, a little <b>under 6% of total AUMs</b> with <b>institutional investors</b> were allocated to <b>private equity and venture capital.</b> This share, however, is expected to <b>largely remain stable by 2023,</b> as per BNP Paribas. </p> </div> </div> <div class="cards-shadow" style="margin-top: 50px;"> <div> <div class="content-defi abstop">3</div> <p class="content-defi" style="text-align:center;">Given that dispersion of returns under PE/VC funds is almost 3x that of public equities, it is reasonable for large institutional investors not to risk greater amounts of capital towards such investments.</p> </div> <div> <div class="content-defi abstop">4</div> <p class="content-defi" style="text-align:center;">Hence, even though institutional investors may still believe in a start-up’s story, they will tend to push it towards a public listing when it grows to an appreciable size in order to manage their own risk.</p> </div> </div> </div> </div> <div class="content-defi " style="margin-right:0 !important;padding: 20px 30px;background: #F2EFEA;"> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi" style="color: #002D9C;margin-bottom: 0px;font-size: 24px !important;margin-bottom: 15px;"> <b>Challenges of an IPO: </b> </p> <div class="sect1-blog" style="display: flex;align-items: center;"> <div> <img class="max-min-100" src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e50a67f1d714b88f7c4_Asset%2010%404x.png" style="min-width: 450px;max-width: 450px;"> </div> <div> <p class="content-defi" style="padding-left: 20px;">As lucrative as this may sound, <b>IPOs come with their own set of challenges</b> for the investors and management of a startup. </p> </div> </div> <br> <p class="content-defi" style="margin-top: 15px;">This is especially true when:</p> <p class="content-defi"> <b>1. Your company has a revolutionary technology and a product, but still needs deep pools of capital to hit a scale to become profitable on a sustained basis.</b> </p> <div class="cards-shadow" style="margin-top: 50px;"> <div style="background:white;"> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;"> <b>Virgin Galactic,</b> which <b>aims to promote space tourism;</b> or </p> </div> <div style="background:white;"> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;"> <b>MP Materials</b> – a mining and refining company that <b>wishes to become one of the largest producers of rare earth minerals outside of China.</b> </p> </div> </div> <p class="content-defi" style="margin-top: 15px;"> <b>Note:</b> Rare earth minerals are critical to the supply chains of microchips, EVs, and electronic devices. </p> <p class="content-defi">These two companies become important in a later context in this essay.</p> <br> <p class="content-defi"> <b>2. Markets are volatile both ways, as they are currently.</b> </p> <div class="cards-shadow2" style="margin-top: 50px;"> <div style="background:white;"> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;">Investment bankers could price your equity too conservatively when your employees and your investors cash out. </p> </div> <div style="background:white;"> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;">Once listed, the stock could possibly go up in the market by up to 30-40%, allowing retail and public equity market investors to benefit at your expense. </p> </div> <div style="background:white;"> <div class="content-defi abstop">3</div> <p class="content-defi" style="text-align:center;">This is especially true when the equity markets are at their whipsawing worst since 2008.</p> </div> </div> <br> <p class="content-defi"> <b>3. Your company could have been valued by private markets and VC investors on the basis of a different story</b> </p> <p class="content-defi"> <b>Remember Uber, Lyft, and WeWork?</b> <br> which public markets are not willing to buy. <br> <b>The result</b> – a steep decline in stock price post listing that leaves a stampede of investors and key talent in its wake. </p> <br> <p class="content-defi"> <b>4. IPO process too overbearing</b> </p> <p class="content-defi">You need capital, but <b>a traditional IPO process could take as much as 12-18 months,</b> locking in the time of senior management and key investors who have to suspend their core deliverables to tour around the world with the bankers on a roadshow. </p> <br> <p class="content-defi"> <b>5. The risks of pricing failure</b> </p> <p class="content-defi">Finally, while investment bankers do their best to provide insurance to your start-up for such risks, <b>that comes at a high price.</b> </p> <div class="cards-shadow" style="margin-top: 50px;"> <div style="background:white;"> <div class="content-defi abstop">1</div> <p class="content-defi" style="text-align:center;">Especially so when there is a lot of uncertainty – either in the overall market or about your startup specifically. <br> <br> Indeed, there isn’t an exact convergence -by design- between your interests and that of your bankers in the IPO process. </p> </div> <div style="background:white;"> <div class="content-defi abstop">2</div> <p class="content-defi" style="text-align:center;">They are helping you determine a fair price for your stock, which is based on the future prospects of your company. <br> <br> At the same time, they are also trying to leave some money on the table for institutional investors. <br> <br> This is important because these institutional investors in public markets are the repeat clients who could subscribe to future IPOs that these banks sponsor. </p> </div> </div> <div class="cards-shadow" style="margin-top: 50px;"> <div style="background:white;width: 100%;"> <div class="content-defi abstop">3</div> <p class="content-defi" style="text-align:center;">Apart from conservatively trying to price your stock below its fair price, there are additional ways in which Investment banks insure themselves against the risks of failures in pricing. </p> </div> </div> <div class="cards-shadow" style="margin-top: 50px;"> <div style="background:white;"> <div class="content-defi abstop">4</div> <p class="content-defi" style="text-align:center;">There are lock-ins to prevent current investors from selling off their shares immediately upon listing (in case they suspect that share prices post-listing could sharply fall off). <br> <br>And then there are the famous Green shoe options that allow the investment bank to stabilize prices by buying or selling up to 15% of the floated shares. </p> </div> <div style="background:white;"> <div class="content-defi abstop">5</div> <p class="content-defi" style="text-align:center;">All of this is important because investment banks in essence work in the interests of the overall IPO market. <br> <br> Therefore charge a price for providing these services when the volatility or uncertainty around the company’s pre-IPO valuation is high. </p> </div> </div> <p class="content-defi" style="text-align:center;margin-top: 20px;"> <b>The greater the volatility, the greater the price.</b> </p> </div> </div> <br> <div class="p20" style="max-width: 800px;margin: auto;padding: 45px;padding-top: 10px;"> <p class="content-defi">We, hence, circle back to the same question – <br> <b>Are there alternative structures, especially for startups, that allow them to enjoy the benefits of public listing, at a lower price and at a faster pace, and is the answer SPAC?</b> <br> <br> <b> The answer is - <br> <br> Special Purpose Acquisition Companies (SPACs) </b> seem to be a strong alternative. That said, expert opinions about them tend to be very polar. Which is what makes them an interesting subject for this essay. <br> <br> <b>But hey, What exactly is a SPAC? </b> </p> <ul class="content-defi"> <li> <b>A SPAC or a blank check company</b> is basically a corporate shell company that is sponsored by a well-known investor. </li> <li>A SPAC is <b>almost always a publicly listed entity, with a single purpose</b> – to find a private company and merge with it. </li> <li>When a <b>SPAC merges with a target company,</b> the shares of the two companies become one; therefore, the <b>merger immediately makes the target company public.</b> As a result, the private company goes public without an IPO. </li> </ul> <p class="content-defi"> <b>Interested to know more about SPACs?</b> <br> Stay tuned for our next article <b>‘PART 2 - SPAC: A fortune cookie with a unicorn in it’</b>, where we discuss and cover every facet of SPACs in detail! <br> <br> If you do not want to miss out, you may <b>subscribe to our Newsletter today!</b> </p> </div> <div style="text-align:center;"> <a href="https://staging-web2.kristal.ai/ind/kristal-private-markets#register"> <img src="https://global-uploads.webflow.com/614a9edd8139f5def3897a73/63202e51623a6a5b40f3b6fa_Asset%2023%404x.png" style="width:200px;"> </a> </div>

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Kristal Private Markets

September 13, 2022

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