New York lawyer Douglas Ellenoff’s firm was the go-to adviser for “blank-check” initial public offerings long before the niche market exploded into the most fashionable way to go public.
Ellenoff Grossman & Schole’s top spot among legal advisers for special purpose acquisition vehicles is now in danger. Some of the country’s largest and wealthiest law firms are getting in on the game and looking to pluck talent from established SPAC players.
“We are competitive people and we don’t shy from the challenge,” Ellenoff said. “There was a period of time where no large AmLaw 200 firm would have considered poaching from us.”
Ellenoff Grossman lawyer Ari Edelman left the firm to join Reed Smith this month.
SPACs are an alternative to a traditional IPO that allow investors to raise money that they promise to use to buy a private company down the line. The “blank check” company will either acquire a private business, taking it public in the process, or return investors’ money. Low interest rates, providing small investors access to private companies, and favorable terms for the sponsors of SPACs have all been cited as reasons for the boom.
Blank check IPOs have raised roughly $30 billion through the first eight months of the year, which more than doubles all of last year’s $12.4 billion. SPACs are becoming an important market for law firms as they infringe on the lucrative IPO business for which some firms are well known. Blank check IPOs account for more than 40% of IPOs by volume this year through August, according to data compiled by Bloomberg.
Momentum in the market has been building since a record 2019 saw popular companies like DraftKings Inc. and billionaire Richard Branson’s space company Virgin Galactic Holdings Inc. go public through a sale to a blank check company. Those deals burnished the market’s image enough that private equity firms like TPG and hedge fund bosses like billionaire Larry Robbins have made SPACs a part of their business acquisition strategy.
Lawyers advise on the fundraising process and file traditional IPO paperwork for the blank check entity. They’re also involved in financing deals, known as PIPEs, that raise more funds for the ultimate business acquisition, a process that also requires legal due diligence work and other going-public preparations. The work is helping to propel the financial engine of Wall Street firms that are outpacing smaller firms, buoyed by record-setting activity in a number of capital markets practices this year.
SPACs have been criticized as a bonanza for advisors’ fees including for bankers, accountants, and lawyers.
“That’s because there is a lot more going on and so many more participants,” said Daniel Forman, a partner at Proskauer Rose.
‘Off the Charts’
Ellenoff’s firm says it has been involved in more than 260 blank check IPOs in the past 15 years, ranking as the market leader. But its grasp on the top spot is slipping.
The firm has advised on the most SPACs raising the most money every year since at least 2017, according to data compiled by Bloomberg. Through August last year, the firm had worked on 19 deals that raised $4.5 billion, good for nearly a quarter of the entire market.
That was during a time when 33 SPAC IPOs were priced. During the same period this year, 84 blank check companies hit the market, led by a wide range of players including financial luminaries like Bill Ackman and upstarts like former Oakland A’s general manager Billy Beane.
Ellenoff Grossman & Schole has still handled a similar deal flow: 16 SPACs worth $4.5 billion, the Bloomberg data show. But its position has been leap-frogged by a host of Big Law firms: Skadden, Arps, Slate, Meagher & Flom, Ropes & Gray, and Davis Polk, just to name a few.
Through August, Skadden advised on 23 blank check IPOs to lead the way by deal count while Ropes & Gray advised on deals that raised $8 billion, topping the data compiled by Bloomberg.
“The sponsor groups have gotten better, the deals have gotten bigger, and it has been accepted as a financial tool in more and more places,” Gregg Noel, a Pal Alto-based Skadden partner, said. Noel, whose team has worked on more than 160 SPAC deals since 2006, described the pace of work in multiple capital markets practices this year as “off the charts.”
Big Law firms are often slow to invest in new markets, preferring to wait until they attract the type of clientele and prestige that will support high-end rates, which soar well past $1,000 an hour. With a market as important and lucrative as IPOs shifting quickly, some of the country’s biggest firms are feeling an urgency to cash in, leveraging longstanding relationships with private equity firms and big-name money managers.
“The program proved itself over the last 20 years so the large firms with reputations they need to protect don’t feel uncomfortable,” Ellenoff said. “Their clients have made it very clear they want them to get into the business.”
Cadwalader Wickersham & Taft, one of the country’s oldest law firms and a blank check newcomer, this year advised on the largest SPAC to-date: Bill Ackman’s $4 billion Pershing Square Tontine Holdings. Stephen Fraidin, the Cadwalader partner who led the deal, is Ackman’s longtime lawyer and a former vice chairman of his Pershing Square Capital Management. It’s the lone SPAC deal this decade credited to Cadwalader, according to Bloomberg data.
Weil, Gotshal & Manges has represented two blank check companies that raised more than $1 billion each and were led by Las Vegas Golden Knights owner William Foley, whom the firm has represented in other transactions. Paul, Weiss, Rifkind, Wharton & Garrison has also led multiple $1 billion-plus SPAC IPOs, both raised by former Citigroup executive Michael Klein.
Cadwalader, Weil Gotshal, and Paul Weiss are the only three law firms to advise the issuers on the five SPAC IPOs that have raised more than $1 billion this year, Bloomberg data show.
SPAC business wins can be a source of continued revenue for law firms. Helping a blank check company raise a pool of money is only the first step in the process. The firms can also hope to advise the new company when it acquires a private entity in order to take it public, known as a “De-Spac.” Partners at large firms, where slews of capital markets and mergers and acquisitions attorneys make them one-stop shops, give them an edge over smaller competitors.
“If you take our capital markets practice and our M&A practice and public company practice, we press all the right buttons,” said Ryan Maierson, global chair of Latham & Watkins’ public company practice.
Big Law Beneficiaries
The activity hasn’t yet spurred a talent war, with only a few lawyers well-known in the SPAC space making moves between law firms in recent months. White & Case recently hired a Winston & Strawn team involving New York-based partners Joel Rubinstein, Jonathan Rochwarger, and Elliott Smith.
Paul Tropp, co-head of the capital markets practice at Ropes & Gray, said it’s too early to tell if partners will begin moving between firms.
“The bigger deals are enabling the fee structures of the larger law firms to get involved,” Tropp said. “And the relationships that the partners at the larger law firms have with SPAC sponsors and increasingly the bulge bracket investment banks that are becoming significant players in the marketplace is all feeding off of one another.”
Some SPAC lawyers see hints of other lines of legal work that migrated to Big Law firms after catching on as niche offerings, like master limited partnerships in the oil industry, high-yield debt offerings, and trust-preferred securities.
Ellenoff said his firm’s fee structure will help it hold its own in the newly competitive market. His hourly rate tops out at $800, and three-fourths of the firm’s fee is contingent on the SPAC IPO closing, he said, a flat-fee structure that Big Law firms rarely offer.
Ellenoff is also already pivoting to online crowdfunding, which he thinks is the next hot legal market in finance. His firm’s willingness to dive into new markets is one trait bigger firms are unlikely to match .
“It’s all meant to compete with what we have: flexibility,” Ellenoff said.
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