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Decades-Long SPAC Bet Pays Off for Law Boutique Beating Titans

March 8, 2021, 11:01 AM

Douglas Ellenoff became a true believer in special purpose acquisition companies when his first one found him almost two decades before they became the next big thing on Wall Street.

But even he never foresaw $33 billion of deals being done in a single month, as was the case in February, or that they’d lure investors from hedge-fund billionaires to athletes and celebrities like Alex Rodriguez and Shaquille O’Neal. The feverish pace has Ellenoff’s 120-lawyer firm, Ellenoff Grossman & Schole, working harder, hiring faster, and watching its back more than ever to keep its lead in helping SPACs go public.

So far it has, closing even more deals this year than Big Law titans like Kirkland & Ellis and Skadden Arps Slate Meagher & Flom, according to data compiled by Bloomberg. Through the first two months of the year, the firm advised on SPAC IPOs that raised nearly $10 billion.

“Right now, every phone call is new business. And that seems like a high-class problem to have, which it is,” said Ellenoff, 61, who is based in New York, adding: “But you can’t take all the work they want to give you, which is not a great place to be.”

As a boutique firm in the finance practice, it has to zig where Big Law zags. Even now, Ellenoff is lining up his next act in the online crowdfunding market, which was launched less than a decade ago.

Ellenoff charges about $800 an hour for his time—about half of what some New York capital markets partners earn. Part of his firm’s fee is dependent upon the deals getting priced, a contingency Big Law firms don’t like to offer. And he has nearly two decades of relationships and experience in the product he has helped shepherd into the mainstream.

“Doug has made it a focus of the law firm and he has got a well-deserved reputation in the marketplace for what they do,” said Gregg Noel, head of Skadden’s West Coast capital markets practice and a long-time SPAC advisor. “He pays attention to SPACs and I think that’s important.”

SPAC Repair

Developing practices where bigger firms have little interest is how Ellenoff got involved in SPACs in the first place.

Ellenoff had experience representing clients on reverse mergers—another reputation-hindered IPO alternative that involves purchasing the shell of a public company. It’s also technically the second step in the SPAC process.

So when a client asked about SPACs around 2003, Ellenoff was comfortable with the idea. He’s since helped introduce some of the mundane changes that made SPACs more flexible and popular.

Douglas Ellenoff
Courtesy of Ellenoff Grossman & Schole

In the early 2010s, for instance, he said his firm pioneered the ability for SPAC investors to redeem their investment and get their money back even if they voted in favor of a proposed acquisition. Previously, investors could only ask for their money back if they voted against a proposed deal.

But that change raised a destabilizing threat. An unpopular acquisition target could cause a rash of investor redemptions, wiping out the funds the SPAC had raised.

That problem was solved by the industry’s introduction of so-called PIPE transactions, which raise a separate pool of capital from private investors committed to the specific acquisition a SPAC is proposing. Ellenoff doesn’t take credit for the introduction of PIPEs to supplement SPACs, but his firm is also among the most active in the PIPE market.

“We are not passive recipients who are just executing legal work,” Ellenoff said. “We are much more involved in the formation, creation, and iteration of each of these programs. Because you have to be a public service announcement for them in order to dispel the mythology.”

Ready for Takeoff

While Ellenoff was quietly working on their reputation for a decade, the tipping point for SPACs came in 2020 with the success of blank-check acquisitions such as sports gambling website DraftKings Inc., Richard Branson’s space flight company Virgin Galactic Holdings Inc., and electric truck startup Nikola Corp.

In February alone, 92 SPACs hit U.S. public markets, raising a record $33 billion, data compiled by Bloomberg show. The feverish fundraising to start the year puts SPACs on pace to quickly blow past the single-year record of nearly $80 billion they raised in 2020.

A handful of Big Law firms have already grabbed a sizable market share. Those firms include Kirkland & Ellis, Skadden Arps, White & Case, Davis Polk & Wardwell, and Ropes & Gray—each of which advised on more than 40 SPAC IPOs in 2020. They are all on pace to shatter their previous deal records, all set last year.

Those firms employ more than 20 times more lawyers than Ellenoff Grossman does. Those firms’ partners also earn more money than almost any firm, allowing them to recruit lawyers of their choice. The average equity partner at the least profitable firm in the bunch, White & Case, earned more than $2.5 million in 2019, according to the latest available data from The American Lawyer.

Keeping the bigger, better-paying firms from poaching its lawyers is another of Ellenoff Grossman’s growing pains. One of its partners, Ari Edelman, departed in September to join Reed Smith, another giant firm that has recently boosted its activity in the SPAC market.

Asked if his firm could compete with the salaries on offer at the firms now working in the space, Ellenoff said: “It’s fair to say my entire life is enjoying a little competition.” He said the firm has taken “defensive postures to make it so that EGS is a place people want to stay.”

The firm is trying to hire more M&A lawyers so it can acquire a bigger share of the work closing acquisitions for SPACs, known as de-SPACs. That work is mostly handled by the biggest firms.

“We take no joy in people working this hard,” Ellenoff said. “Having said that, we were not going to let the opportunity come and go without a nice competitive response to all those other firms that are trying to take our market share.”

Noel said the SPAC practice is bound to spread out among more law firms as the number of deals increase. One reason is capacity. Many practices are focused on servicing their existing clients, he said, and even the U.S. Securities and Exchange Commission is feeling the squeeze.

“The whole infrastructure around it, at almost every place, is very stressed,” Noel said. “The only person who can’t say I’m not taking on any more business is the SEC, and they are just saying turnaround times will be slower.”

An ‘Extraordinary’ Run

SPAC critics see their rise as a bubble fueled in part by the friendly terms that sponsors, who invest the upfront money, can receive in the new entity. Even Kirkland’s former chairman, Jeffrey Hammes, has joined the frenzy, raising $150 million for a SPAC targeting legal technology acquisitions. (Kirkland partner Christian Nagler advised the SPAC, L&F Acquisition Corp.)

“It’s addressing a structural need that public markets need more interesting companies to invest in, and SPACs cause that to happen,” Ellenoff said.

If the pace of his firm’s early-year deal flow were to last throughout 2021, Ellenoff’s firm would advise on more than 410 SPAC IPOs. That’s 100 more deals than occurred in the entire market last year, according to data compiled by Bloomberg.

However long the boom lasts, Ellenoff said he’s “thankful” for the popularity of SPACs, calling what’s happened to his firm “extraordinary.”

But if SPACs go out of fashion as quickly as they launched into the mainstream, Ellenoff has chips down on other practices. He’s convinced enough that crowdfunding finance will take off to have invested in a technology offering, iDisclose, that he likened to TurboTax for crowdfunding disclosures.

“At worst, we’ll become generic securities lawyers representing public companies doing financings,” he said. “That’s not such a bad thing.”

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Rebekah Mintzer at rmintzer@bloomberglaw.com; Chris Opfer at copfer@bloomberglaw.com

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