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February 18, 2020
Welcome to the SPAC Research weekly newsletter.

Promote Forfeiture and Incentive Alignment
No sponsor wants to give up promote shares. Every IRR analysis that a sponsor presents to its LPs or its risk capital syndicate paints an impressive picture of the returns that will be realized. And it seems like it would be a lot harder to deliver 5-10x on risk capital if you give up half of your promote.

And yet sponsors depend on building a partnership with target companies that seek a public listing via the SPAC route. One of the appealing features for an operating company of listing via SPAC is that you can align incentives by putting promote shares and rollover equity into an earnout. All else equal, it's easier to get the buy-side to commit capital to a deal if the sponsor is willing to put some of its promote at the back of the line, behind a share price or EBITDA earnout threshold.

We wanted to measure how incentive alignment has been received by the market. So we took all 30 SPAC deals that have closed since the beginning of 2019 and measured the fraction of the sponsor's promote that they held onto without any strings attached. Promote shares subjected to an earnout are excluded from this study even if they have since vested.

There's a clear trend. Deals where the sponsor has been willing to sacrifice something have traded better than deals where the sponsor has held onto the entire promote.

Nearly every one of the year's best performing deals included some measure of promote forfeiture. And until Vertiv (NYSE: VRT) closed this month, none of last year's deals where the sponsor held onto 100% of the promote traded above $10.

And what about the sponsor's at-risk purchase?
You can see a similar phenomenon with forfeiture of risk purchase securities. Fewer sponsors have sacrificed their private placement warrants or units in connection with a deal. But those that have produced deals that have performed better in the market.

Sacrificing warrants may not be necessary if both sides know a deal isn't likely to trade well. But for targets with a high-growth bull case, it seems reasonable to ask a SPAC's sponsor to give up warrant exposure -- or use it to facilitate an arms-length PIPE investment.

Many of 2019's deals have traded well and a handful of sponsor promote earnouts have already been achieved. That is part of how Churchill I's sponsor managed to turn an $18mm investment into more than $550mm in a little over a year, for an incredible 2967% return on its initial investment.

Next week we'll look at the mark-to-market returns achieved by all SPAC sponsors that closed deals last year.

News From the Past Week
IPOs and S-1's
  • Churchill Capital Corp III (CCXX) upsized its IPO to $1bn and will become the largest US SPAC IPO ever, as long as approximately 1/3 of its over-allotment gets exercised. Citigroup and Goldman Sachs are joint book-runners.
  • CITIC Capital Acquisition Corp. (CCAC) and Greenrose Acquisition Corp. (GNRS) both priced IPOs and opened for trade on Tuesday 2/11/2020.
  • Yunhong International (ZGYH) priced an upsized $60mm IPO for an acquisition in Asia (excluding China). Yunhong, which took 229 days from Initial S-1 until pricing of its IPO, is Maxim's first deal since Fellazo, Inc. (FLLC) in July of last year.
  • Newborn Acquisition Corp. (NBAC) raised $50mm for an acquisition in Asia (excluding China). Chardan is sole book-runner.
  • Flying Eagle Acquisition Corp. filed to raise $500mm. Flying Eagle will be the sixth SPAC from Harry Sloan and Jeff Sagansky. The fifth, Diamond Eagle (DEAC), is in the process of merging with DraftKings and SBTech and is currently trading around $17. Deutsche Bank, which was lead left on every Eagle SPAC since Silver Eagle in 2013, is noticeably absent from Flying Eagle's cover. Goldman Sachs is sole book-runner.

Deal Recut
  • Act II Global Acquisition (ACTT) recut its transaction to form Whole Earth Brands to reduce the number of shares outstanding at closing, including a sponsor forfeiture of 3mm shares. The company also signed a $75mm private placement led by Baron Small Cap Fund and ACT II's sponsor agreed to forfeit 61% of its warrants. Shares traded to $10.30 on the news, approximately 1.5% above cash in trust.

Deal Approvals
  • Boxwood Merger Corp. (BWMC) closed its acquisition of Atlas Technical Partners on Friday 2/14/2020. Approximately 19mm public shares (94.9%) were redeemed at closing. Shares and warrants will trade on the NASDAQ as "ATCX" and "ATCXW" on Tuesday 2/18/2020.
  • B. Riley Principal Merger Corp. (BRPM) closed its acquisition of Alta Equipment on Friday 2/14/2020. Approximately 1.05mm public shares (7.3%) were redeemed at closing. Shares and warrants will trade on the NYSE as "ALTG" and "ALTGW" on Tuesday 2/18/2020.
  • Gores Holdings III (GRSH) closed its acquisition of PAE on Monday 2/10/2020 with almost no redemptions. Shares traded up to $11.50 on Friday on the NASDAQ under ticker symbol "PAE."
  • TKK Symphony Acquisition (TKKS) closed its acquisition of Glory Star on 2/15/2020. Approximately 99.9% of public shares were tendered for a price of $10.31 each. Shares and warrants will trade under the ticker symbols "GSMG" and "GSMGW" on Tuesday 2/18/2020.

Meetings and Extensions
  • Tenzing Acquisition Corp. (TZAC) will hold a meeting Tuesday 2/18/2020 to extend its charter until 5/26/2020 (or 6/23/2020 if the company has executed a definitive agreement). The sponsor will contribute $0.033 per unredeemed share for each month through the extended deadline.
  • Pure Acquisition Corp. (PACQ) will hold a meeting Thursday 2/20/2020 to extend its charter through 5/21/2020. The sponsor will contribute $0.033 per month for each unredeemed public share through the extended deadline. The company's sponsor also has an active tender offer to purchase the remaining 3.16mm public warrants for $1 each in cash.
  • Leo Holdings Corp. (LHC) and Mudrick Capital Acquisition (MUDS) shareholders approved extensions until 7/31/2020 and 8/12/2020, respectively. Neither company's sponsor will make a trust contribution in connection with the extensions.
  • Here's a piece on SPACs and their benefits vs. traditional IPOs from Bloomberg Law.
Disclosures: Site administrators are long CCXX.U, CCAC.U, FLLCW, FLLCR, BWMCW, BWMC, BRPM, BRPM/W, TZACW, PACQ, PACQW, LHC, LHC/W, MUDSW and may trade in or out of positions in these or other SPAC securities at any time. Information from is provided for informational purposes only and should not be relied upon as the basis for any investment decision. Nothing on is a recommendation or solicitation to buy or sell any investment.