A well-planned SPAC creates a good option for growth-stage companies, compared to an IPO. The consumer goods industry is full of emerging, growth-stage companies looking to disrupt the marketplace. They increasingly want access to public markets, and the special purpose acquisition company (SPAC)—a blank check company designed to pool funds to finance an acquisition or merger within a stated time period—is an increasingly attractive option.
Despite hot consumer and retail IPO activity, including big names like Oatly, Rent the Runway, and Sweetgreen, regular IPOs have been a mixed bag for consumer and retail firms. Some have missed earnings from the start, costing them 30-40% of market cap evaluation within months or even weeks.
This is why Aarti Kapoor, CEO of VMG Consumer Acquisition Corp., says a well-planned SPAC creates a good option for these firms, compared to an IPO. It also creates attractive opportunities for investors. The corporation is a SPAC that had its IPO in mid-November on the Nasdaq exchange.
SPACs have grown in numbers from 59 in 2019 to nearly ten times that in 2021, representing nearly US$135 billion. But there are many variations including industry focus, business models, and geographies.
“You can’t pop all SPACs into one category, and we’ve seen retail investors do that sometimes,” Kapoor says..
VMG attracted a broader range of institutional investors than expected and was seven times oversubscribed, which she partially attributes to the consumer industry’s relatability. Yet despite no shortage of attractive target companies, she says consumer-focused SPACs are underrepresented. According to Credit Suisse data, consumer SPACs are only 7% of the market. Why aren’t there more?
Kapoor says this is because specialized skill sets and the ensuing track record of success in consumer industries is scarce among SPACs. In her view, most investment professionals who manage SPACs lack the background to evaluate consumer companies.
“It’s this exact lack of specialization in consumer investing that was one of the key catalysts for us at VMG for entering the SPAC market,” she says. “We knew we could add a lot more value.”
There’s a “flight to quality” in the SPAC arena, where advisors, banks, and others in the investment community are looking for quality and likelihood of deal execution, Kapoor adds. For retail investors this means not only investing in a SPAC model they understand, but with a team that has a proven track record. In a recent interview with Penta she offered these tips for getting into consumer SPACs.
Understand the Sweeteners
Potential SPAC investors need to check three key terms of their investment: overfunding, warrant coverage, and duration. “They’re usually what you see first as an investor, so it’s important to understand them,” she says.
Overfunding puts an amount worth more than 100% of the offering’s gross proceeds in a trust account, allowing investors to receive a return on redeemed shares. With buyside investors gaining more leverage on terms due to some softening of the SPAC market, overfunding has started to become more popular in SPACs, enhancing the yield for investors who decide to redeem shares. In 2021’s fourth quarter, 119 out of 134 deals were overfunded by at least 1%, compared to only eight out of 290 in the year’s first quarter.
The ratio of warrants to purchase an identified number of shares, which is packaged in SPAC units, is known as warrant coverage. While higher warrant coverage is attractive for investors, if the coverage is too high it’s challenging for a SPAC to achieve a deal on the back-end because it dilutes the value of the shares too much.
“You want to make sure that you are somewhere in the middle of the road to make sure you are getting the sweetener as an investor that you deserve,” she says.
The SPAC’s duration, or timeline to secure a deal before it is wound-up, also requires balance. The shorter it is, the sooner an investor receives a return on their investment. But if the duration is too short, the the SPAC will be pressured to get any deal done (as opposed to an optimal deal) within its time frame.
Find the Right Model
Kapoor says investors need to think about what industries, business models, and themes they have conviction in.
“When investing in a SPAC, you’re investing in a vehicle and a team’s ability to find a great company,” she says. Since investors don’t know the target company, it’s necessary to know they align with key themes and investment tenets of the SPAC, which can vary widely. For some investors this means a more generalist SPAC could be less of a […]
source Future Returns: Investing in Consumer Special Purpose Acquisition Companies
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