Zach Fisher, Managing Director, TMT Investment Banking
Special purpose acquisition companies, or SPACs, now account for approximately one fourth of the entire U.S. IPO market, a result of higher-quality participants, from investment banks to private-equity firms, giving the product validation. A growing percentage of these SPACs have affiliation with an alternative asset manager. In IPO Edge’s, second SPAC Roundtable, Institutional Recognition and Beyond, Zach Fisher, a Managing Director in the TMT Investment Banking Group at Cowen, explained why that may be. Mr. Fisher also pointed out that SPACs allow owners of the selling company to take a significant amount of cash off the table, which can have appeal in a decade-old bull market. The full interview is below:
IPO Edge: What makes a good target?
Mr. Fisher: Being public company-ready, having audited financials, being of the appropriate size, having a clear comp set, having a good management team, and a clear use of proceeds.
IPO Edge: What’s driving the success of SPACs?
Mr. Fisher: First, high-quality targets are going public through SPAC mergers. In addition, you’ve had an increase in the quality and quantity of all other market participants: investment banks, SPAC sponsors, PE sellers and fundamental equity institutions who invest in the pro forma public companies.
More private company owners have become comfortable with a SPAC merger as a way to access public markets. If your company is in an industry where public valuation multiples are attractive relative to other alternatives, then SPACs can be a very attractive way to access those multiples.
IPO Edge: What should a SPAC sponsor look for in an investment bank?
Mr. Fisher: We put ourselves in a SPAC sponsor’s shoes and attempt to assess the total return provided to the sponsor throughout the life of the SPAC for the gross spread dollars. Although the term of the SPAC is limited, a SPAC goes through many different phases from IPO to the closing of a business combination … and beyond. At Cowen, we try to take a holistic approach to the value we provide to our sponsor partners throughout the life of the SPAC.
Following the IPO, the sole mission of the SPAC sponsor is to source the best merger target possible. At Cowen, we have over 200 investment bankers across five industry verticals: healthcare, technology, consumer, industrial, and energy. In addition, we have a meaningful private equity and family office coverage practice. We deploy all of our bankers – and the entire firm really – to help source that target.
Additionally, we deploy our capital markets team to evaluate the public market viability of a target. Research analysts conduct independent due diligence on target companies. Our equity research team, now over 50 publishing analysts covering over 900 public companies, can also help educate from fundamental investors during the de-SPAC roadshow process.
As a leading IPO bookrunner, generating new fundamental equity demand from new investors where we have longstanding relationships is something we do as part of our everyday business. We apply the same playbook and commitment from capital markets, sales distribution and research to our SPAC merger engagements.
Post-close, we can continue to support the company in the public markets via research coverage, corporate access, trading / market making, as well as ongoing M&A and capital markets advisory services. In totality, we hope that’s how we earn our gross spread.
IPO Edge: Are you selective in the clients you choose?
Mr. Fisher: Yes. There’s a reason why we aren’t the highest-volume underwriter. We never have been and I don’t believe we ever want to be. There are underwriters who collect the 2% upfront gross spread on the IPO and hope for the best on the back-end with little support or engagement along the way. That approach is conducive to leading the league tables in SPAC IPO issuance, but that’s not our focus here at Cowen. A traditional IPO consists of an offering and then the transaction is complete. Our view is that while the SPAC IPO gets you through the first inning of the game, you still have eight more innings to play. Some firms who underwrite SPACs just don’t have the infrastructure to be as supportive during the “middle innings” and back-end.
Cowen also doesn’t cover all industries. If we don’t line up well from an investment banking, research and capital markets perspective with the industry focus of the SPAC, Cowen is likely not the best underwriting partner. Our focus continues to be on achieving successful merger outcomes for our SPAC sponsor partners who line up with Cowen’s industry DNA.
IPO Edge: What else is important to know about a SPAC vs. a regular-way IPO?
Mr. Fisher: In a regular-way IPO, it’s very often 100% primary. SPAC mergers can have a significant secondary percentage.
That’s important if you think about what inning we are in of this bull market. For an issuer to achieve secondary liquidity on the traditional IPO path, it’s typically a two-step process: IPO, all primary, followed by a secondary at some point down the road. In a SPAC merger, you can condense this two-step process into one. In this market, partial de-risking on the first transaction rather than waiting for a secondary offering is currently attractive to private company shareholders.
IPO Edge: How do you feel about helping SPACs find targets when you weren’t already with them at the IPO?
Mr. Fisher: SPACs who have completed an IPO with another underwriter do approach us seeking assistance on deal sourcing, which is completely natural. Once a SPAC completes its IPO, the sponsor team can and should reach out to every potential deal source seeking a merger target. Cowen, as I’m sure other SPAC underwriters do, prioritizes its deal flow for those SPAC partners for whom it has been IPO underwriter.
As previously mentioned, we are selective on the total number of sponsor teams we underwrite, especially in any one particular sector. Each SPAC process from IPO to completion is very consuming. To give each SPAC sponsor team the attention they deserve, it takes a village. We have to be thoughtful about how we commit that village.
IPO Edge: Warrants are dilutive. Do you see a trend of warrants being redeemed early to reduce dilution?
Mr. Fisher: There are differing views in the market regarding the perceived overhang of those warrants. In some cases, you’ll have PIPE investors require the warrants to be fully or partially tendered at the close of the merger with some of the cash proceeds raised in the transaction.
IPO Edge: Occasionally SPACs have affiliations with asset managers. Why is that a smart strategy?
Mr. Fisher: Roughly one in five SPACs issued last year has been affiliated with an alternative asset manager. We certainly understand the appeal to potential targets, as a SPAC with a connection to a committed capital source can increase perceived certainty on the back-end.
You might ask, why are funds that are historically structured to be private investors sponsoring these vehicles?
Answer #1 is speed to market / raise capital: When compared to a traditional committed capital raise, a SPAC can be raised in just three months versus what could be a year plus in traditional committed capital raise.
Answer #2 is time to realization: A SPAC sponsor closes one deal and receives equity, before any capital appreciation, equal to 20% of the SPAC’s shares outstanding with an illustrative 36-month realization timeframe from SPAC IPO to lock-up expiration. If you compare that with a carried interest model and European waterfall economics in a traditional committed PE fund, it’s relatively attractive.
Mr. Fisher is a Managing Director in Cowen’s TMT investment banking team and is also Co-Head of Cowen’s SPAC business. With over 20 years of experience, Mr. Fisher joined Cowen from Morgan Joseph TriArtisan, where he was a Managing Director focused on the technology and media sectors. Previously, he worked at ABN AMRO in the mergers and acquisitions group and ING Barings Furman Selz in the media & entertainment investment banking group. Mr. Fisher holds a BS in finance from Lehigh University. Contact: email@example.com
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