Tim Manning, Managing Director, Special Situations at Cowen Inc.
Cowen Inc. is far and away the leader in secondary-market trading of SPAC shares, giving it a unique window into the so-called de-SPAC process. That is a critical advantage to both investors and sponsors alike, according to Tim Manning, Managing Director in the Special Situations Group at Cowen. In IPO Edge’s 2nd SPAC Roundtable, Institutional Recognition and Beyond, he also explained that SPAC IPOs have become highly popular among fixed-income and risk-arbitrage investors, especially as more banks offer leverage to investors buying SPACs. He ultimately sees SPACs continuing to thrive as more fundamental investors take interest in the product – not only as sellers of companies but as investors in various stages of the SPAC process. The full interview is below:
IPO Edge: We’ve generally seen companies that are profitable go public with a SPAC. Can a growth company that’s loss-making use a SPAC?
Mr. Manning: Absolutely. With an IPO you can’t use forward projections. With a SPAC, you can because it’s a merger. The use of forward projections helps tell a trickier story, so it can help. You can’t publish 2023 forecasts with an IPO. In fact, there are instances of companies that won’t be profitable for a couple of years and have gone the SPAC route. Virgin Galactic Holdings, Inc. is a good example. That’s a story based on 2023 forecasts that has traded very well in the public markets.
It can also allow you to take a more highly-levered company public than you could with an IPO.
IPO Edge: Who are the natural buyers of SPAC IPOs?
Mr. Manning: The amount of capital that’s chasing yield above risk-free treasuries is enormous. A lot of investors look at SPACs as a cash-management tool to find yield on a risk-free basis.
Since SPACs hold cash in a trust and investors always have the option to redeem, you’re introducing a risk-free rate of return. That brings in a lot of credit and risk-arbitrage investors, who make up the lion’s share of the front end (the SPAC IPO itself). The back end, the de-SPAC component I mentioned earlier, becomes the most critical part of the process. Additionally, more traditional equity investors have started to invest in SPACs based on a few reasons: (a) it’s a cash management tool and (b) there is a pre-existing relationship with the sponsor team, or they like to optionality to see a deal earlier than they might otherwise.
IPO Edge: What kind of role does Cowen play in the market for SPACs after they begin trading?
Mr. Manning: Cowen is a very large part of the secondary market in SPACs. Our team has averaged more than 30% market share in secondary-market trading for a long time.
IPO Edge: What has prompted such an interest in SPAC trading?
Mr. Manning: We’ve been in a low interest-rate environment for a long time, fueling a demand for yield. SPACs are a yield-oriented product that includes equity upside that can be levered. As this space has gotten bigger – 4 years ago there was $5+ billion outstanding in SPACs, now we’re north of $20 billion – funds can put real money to work.
Something very appealing about SPACs is the ability to be paid to own an equity option via the warrant when you buy units at a discount to NAV. You get equity upside and a risk-free return.
It’s the only market like that. With a convertible bond or an option you pay a premium.
IPO Edge: What are the advantages of a SPAC vs. a regular-way IPO?
Mr. Manning: As an asset owner, you can take more money off the table in a SPAC merger. We’ve seen examples where a company looked at a regular-way IPO and they could only take $50 million off the table but with a SPAC they could take $200 million off the table and return that to their LPs.
There’s also more pricing certainty. If you know you may have to raise money in a PIPE, you can have that priced before announcing publicly. With an IPO, the price can change dramatically in the last few days.
Another advantage is speed to market. From the time a company talks to a SPAC, a deal can be done in as little as three or four months. It’s six to eight months for regular-way IPOs.
IPO Edge: What’s driving the expansion of the SPAC market and how big can it get?
Mr. Manning: It remains to be seen how big SPACs can get, but there are plenty of investors looking for low risk/high return ideas. Plenty of private equity or family-owned companies would prefer a faster way to come public, more price certainty, and the ability to take more cash off the table upfront. Especially for any company with a story that needs to be told, SPACs are the ideal option. We’re also seeing more and more top-tier sponsors entering the space so I think we will see significant growth in SPACs in the coming years.
We’ve seen private equity-type firms come in on the investor side, not just selling companies to SPACs. More blue-chip investors have come into provide cash through PIPEs.
If you go back 10 years ago, the long-only investor base did not buy SPACs until after the deal closed. That has now changed, where they will come in and buy in the secondary or structure PIPEs. We’ve seen large family offices enter the space as well.
IPO Edge: Are institutional investors able to buy SPACs with leverage to amplify returns?
Mr. Manning: Yes. At this point the European banks are the largest providers of margin on SPACs, but we’re starting to see the U.S. banks getting involved and I expect that trend to continue as they realize the safety in lending on this product. Cowen also provides a swap product to provide leverage to institutional investors.
IPO Edge: What do investors like most about SPAC IPOs?
Mr. Manning: In the current bull market, 90%+ of SPACs are completing acquisitions. When you include the warrant coverage, it’s not uncommon to have deals that trade up 15-20%+. Through SPAC IPOs, investors can achieve equity like upside with T-bill like risk to the downside.
Mr. Manning joined Cowen in 2016, serving as a Managing Director, helping spearhead Cowen’s best-in-class Special Situations business as well as working as a liaison to ECM/Banking on the SPAC product. Mr. Manning spent over 14 years at CRT Capital Group LLC, helping to build their Special Situation and Reorg Equity business. Mr. Manning served in various senior roles at CRT, most recently as Managing Director and Head of Equity Sales-Trading for the NYC region. Mr. Manning holds a Bachelor of Business Administration in Finance from Western Connecticut State University. Contact: firstname.lastname@example.org
Cowen has worked on SPAC transactions including the following recent deals:
Monocle Acquisition Corp. (tickers: MNCL, MNCLU, MNCLW)
Cowen Lead Bookrunner on $175 million IPO in February 2019. Announced business combination with AerSale Corp, a leading integrated, global provider of aviation aftermarket products and services, on December 9, 2019, with an enterprise value of $430 million. The transaction is expected to close in Q1 2020.
VectoIQ Acquisition Corp. (tickers: VTIQ, VTIQU, VTIQW)
Cowen Lead Bookrunner on $230 million IPO in May 2018. VectoIQ is focused on automotive mobility and technology. VectoIQ is currently seeking a business combination target.
Constellation Alpha Capital Corp. (tickers: CNAC, CNACU, CNACW, CNACR)
Cowen Lead Bookrunner for $145 million IPO in 2017. Constellation closed its business combination with DermTech, Inc. (DMTK), a molecular genomics company with a focus on non-invasive diagnostic tests for skin disease, in August 2019 and concurrently raised a $25 million PIPE with high-quality healthcare investors. The stock is currently trading at ~$14.00.
ConvergeOne (tickers: CVON, CVONU, CVONW)
Cowen served as financial advisor to Forum Merger Corporation, as placement agent on a $144 million PIPE and as dealer manager to ConvergeOne on a post-close warrant tender offer. ConvergeOne is a leading global IT services provider of collaboration and technology solutions who completed a merger with Forum Merger Corporation (Nasdaq: FMCI) on February 20, 2018, at an enterprise value of $1.2 billion, resulting in Nasdaq-listed public company ConvergeOne.
The complete roundtable with more interviews can be found here.
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John Jannarone, Editor-in-Chief