Preparing portfolio companies for a SPAC merger
By Jason Menghi, Will Braeutigam & Derek Malmberg, Deloitte
The rise of special-purpose acquisition company (SPAC) transactions is pushing attention to the private equity (PE) space, where promising portfolio companies present opportunities for strong sponsor incentives and investor returns. But if PE managers want to make the most of SPAC opportunities, they may need to help their portfolio companies prepare for the road ahead.
How private equity fits into the SPAC revolution
The acceleration of SPAC transactions and the desire to complete deals with target companies means many venture capital or PE-backed portfolio companies may be public sooner than previously expected. Though the number of companies that are immediately ready for a SPAC transaction may be low, demand is high. The same is true for the advisers and other external service providers who are typically involved in a SPAC transaction.
Not all target companies are ready for the de-SPAC process that merges a private company with a publicly traded SPAC. They may have a promising business and an experienced management team but lack awareness of the key milestones and action items necessary to complete a deal. If PE managers are expecting to take advantage of SPAC opportunities, they may need to help their portfolio companies anticipate impediments.
What the SPAC revolution means for private equity firms
Asking the right questions
PE managers need to understand a principle: Speed matters. The pace of SPAC activity is pressurizing the deal environment. PE firms should be careful not to let themselves, and especially their portfolio companies, get squeezed by the supply of capital into a process that affords little room for error or mistake. Consider as well that SPACs are shifting their gaze to international targets, where the challenge of executing a de-SPAC transaction is even more complex.
All PE firms need to be asking tough questions about the SPAC readiness of their portfolio companies. A checklist would include the following:
What we are seeing right now suggests that many private equity portfolio companies are potentially underprepared. A common problem is that portfolio companies’ audits may not be done to Securities and Exchange Commission (SEC) or Public Company Accounting Oversight Board (PCAOB) standards, and their auditors may not be SEC-independent and/or registered with the PCAOB. But switching auditors can take time, and potentially chill a deal due to delays in being able to provide the requisite audited financial statements.