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

By Christine Idzelis, Institutional Investor

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

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.