Why the ‘Gold Rush’ for SPACs Worries Some Private Equity Managers

Blank-check companies create competition for deals — but buyout firms are also benefitting.

Mark Kauzlarich/Bloomberg

Mark Kauzlarich/Bloomberg

The rise in blank-check companies — a boon to private equity firms looking to cash out from their deals — is worrying some managers.

“It feels a little bit like a gold rush to me,” said James Andersen, co-founder of private equity firm Clearview Capital, during a virtual event hosted on Tuesday by the New York Alternative Investment Roundtable. “Gold rushes almost never end well.”

The boom in special purpose acquisition companies is a “symptom” of the Federal Reserve injecting massive capital into the market, prompting investors to search for returns in areas like SPACs, according to Andersen. Against the backdrop of the resulting high valuations, he said he worries that many SPACs will overpay for companies and fail to perform for investors.

Private equity firms have a large “footprint” in SPAC mergers, according to a Hamilton Lane report this month. About half of companies purchased by SPACs last year were owned by private equity firms, providing them an avenue to exit their deals, said Brian Gildea, head of investments at Hamilton Lane, in an interview Wednesday.

Selling to a SPAC “can be a really attractive exit opportunity,” Gildea said.

Private equity firms have also sponsored SPACs, or blank-check companies that raise capital through initial public offerings and then seek to merge with a company within two years. For example, a SPAC backed by Apollo Global Management announced last month that it was merging with solar financing business Sunlight Financial in a $1.3 billion deal.


“We’ve got several companies that we currently own that are being pursued by SPACs,” said David Coquillette, a managing director at private equity firm New Mountain Capital, during the New York Alternative Investment Roundtable event. That’s creating “a better auction dynamic around those businesses.”

While New Mountain Capital has not yet sponsored a SPAC, “we certainly have been approached by every banker that you can imagine wanting us to do one,” Coquillette said.

SPACs represented about 60 percent of IPOs in the U.S. in 2020, a huge switch from previous years when blank-check companies were a much smaller part of the market, according to Hamilton Lane. SPACs were 31 percent of the IPO activity in 2019 and 21 percent the year before that.

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While Coquillette believes SPACs are “here to stay,” he said the velocity of new listings will probably decline over the next few years. “There would just be an indigestion issue,” he said.

In the meantime, the SPAC market is paving the way for private equity firms to raise permanent capital, “which is always attractive to sponsors,” according to Coquillette. “And more importantly,” he said, blank-check companies open up another exit route for private equity — which has led to New Mountain’s entry to the booming market. A business owned by New Mountain is now under contract to be purchased by a SPAC, according to Coquillette, who said during the virtual event that he didn’t want to name the company that the firm is selling.

New Mountain’s private equity strategy focuses on “defensive growth industries,” with the firm buying controlling stakes in companies that typically have enterprise values ranging from $100 million to $1 billion, according to its website.

Private equity firms seeking to sell companies in their portfolio may benefit from SPACs driving up valuations for larger deals, but on the flip side, blank-check pools can present competition for buyout fund managers aiming to buy a business, according to Clearview’s Anderson.

Coquillette agreed.

“They are competitors,” he said. “We were looking at a business recently where we actually stepped out” because New Mountain believed a couple of SPACs were also circling it. The company had an upper middle-market enterprise value of around $600 million or $700 million, Coquillette recalled during the New York Alternative Investment Roundtable event.

“We’re like, ‘yeah, we’re just not going to spend time on that,’” he said.