A handful of legal advisers is dominating the market for initial public offerings of special purpose acquisition companies, a booming subset of equity offerings that’s nearing an all-time high.
Ellenoff Grossman & Schole LLP currently leads the pack, while larger firms such as Kirkland & Ellis LLP, Skadden Arps Slate Meagher & Flom LLP, and Ropes & Gray LLP are also cashing in on strong demand for legal guidance on SPACs, as they’re called.
These once-eschewed offerings—used to raise funds for future acquisitions of privately held firms— are closing out a third straight year of growth and now account for nearly a quarter of all domestic IPOs.
The 56 SPACs priced for listing on U.S. exchanges in 2019, as of Dec. 5, is the largest annual total since 2007 and it’s the second-most ever recorded in a single year, Bloomberg data show.
It’s creating more business, and competition, for a small group of firms hired to help the issuers, or sponsors, and the financial institutions that underwrite the offerings.
“It would be foolish to say that it’s not more competitive than it was in the ‘90s,” said David Alan Miller, managing partner at Graubard Miller, who helped develop and launch the first SPAC offering back in 1993. “Back then, we had no competition because the product was brand new and so unique. Now that the vehicle has become more mainstream, competition has intensified dramatically.”
Miller’s 25-person firm is consistently one of the top players in the SPAC legal advisory sector.
Five law firms control about two-thirds of the SPAC IPO market share this year based on the total dollar volume of offerings advised, according to Bloomberg data.
And the 10 legal advisers with the largest individual market shares account for almost 90% of total SPAC IPO value.
There’s a clear gap between the few, most active advisers and the rest of the field when accounting solely for the number of offerings on which a firm has worked. Several firms have advised on just one offering this year, while only a small group of firms were involved in at least five SPAC IPOs.
Winston & Strawn LLP, Paul Weiss Rifkind Wharton & Garrison LLP, and Weil Gotschal & Manges LLP are also among the firms with the largest market shares.
Ellenoff Grossman sits atop the list both in IPO count and total offering value, accounting for roughly 25% of the total market share.
Some firms, such as Skadden Arps, work mostly with SPAC underwriters, while others primarily advise the issuers, or a mixture of both.
Given the two-sided structure of the investment vehicle, securing business on the front end can often lead to additional advisory work for a firm’s M&A group near the end of a SPAC’s life cycle.
SPACs have no underlying business operations and consist of a management team tasked with finding a suitable company to combine with, thus taking the target public without an IPO. Business combinations typically must take place within 24 months of an initial listing, and if that doesn’t happen, the company will liquidate and return funds to investors.
Feeding the Beast
Christian Nagler, a partner at Kirkland & Ellis, said the recent increase in SPAC IPOs has led to more opportunities for his firm to represent SPACs in their future M&A deals.
“We’ve had a strong practice this year of representing both issuers and underwriters, and then also doing the M&A activity on the back end,” he said. Kirkland became involved with SPAC IPOs a few years ago and has carved out its place among the most active legal advisers. It now holds the second-largest market share based on offering volume, according to Bloomberg data.
Other firms have also seen their work on SPAC IPOs translate to more business for colleagues who specialize in mergers and acquisitions. Ropes & Gray, another recent entrant into the SPAC IPO advisory sector, holds a top-five share of the market.
Ropes partners Paul Tropp and Christopher Capuzzi spearheaded the firm’s work on SPAC offerings last year after jumping from Freshfields Bruckhaus Deringer LLP, where they gained experience with these listings.
“As we become more engaged in working on these transactions, we have been bringing in a greater number of lawyers at Ropes & Gray to actively work on SPAC mandates, both on the underwriter’s side and on the issuer’s side, as well as on business combination transactions involving SPACs,” Tropp said.
Private equity firms’ increased use of SPACs as an off-ramp for their portfolio companies is often cited as one reason for the continued uptick in SPAC IPOs, as is a bullish equity market and an embrace by a broader swath of the financial sector.
“You’re seeing much more willingness on behalf of target companies, whether private-equity backed or otherwise, to engage in business combinations with SPACs,” said Tropp. “And you’re also seeing more law firms being aware and cognizant of it, so more firms are trying to develop a presence in the marketplace.”
More SPAC sponsors are returning to the well after successful deals, which attorneys say is enhancing the offerings’ sophistication and generating repeat customers.
The arrival of global investment banks in the SPAC IPO market has also sparked new interest and helped pull in larger law firms that those institutions are accustomed to doing business with.
“The broader the base of participants, it actually grows the market,” said Douglas Ellenoff, a partner at Ellenoff Grossman, nodding to the larger firms that have joined the ranks of SPAC offering advisers. “It’s better that those firms have gotten comfortable with the SPAC program.”
As SPACs have grown as a percentage of all IPOs, U.S. exchanges have embraced the offerings. Both NASDAQ and NYSE recently asked the Securities and Exchange Commission to let them ease continued listing requirements for SPACs on their platforms, although neither rule change panned out.
Attorneys say it’s a far cry from how major, domestic exchanges approached the initial wave of these offerings.
Miller, of Graubard Miller, said the first-ever SPAC was rejected by NASDAQ, even after he, the investment bank handling the offering, and the SPAC sponsor appealed the decision several times. It also took close to nine months and 13-15 rounds of comments for the SEC to give its stamp of approval.
“It was a hard sell to convince the public buy-side investors to purchase the IPO,” Miller said. And “it was a hard sell to convince SPAC sponsors to do them.”
Part of the issue, he added, was the less-than-desirable reputation of some blind pool and blank check mechanisms, which lacked some of the investor protections built into SPACs.
Now, that perception has largely faded, and attorneys who work on these offerings say the outlook for SPACs is a positive one.
In the near term, several of the firms most involved with SPAC listings are expecting more of the same—a solid IPO pipeline supported by repeat customers and new entrants alike.
“I think the market is becoming increasingly appreciative of SPACs and the role that they can play in capital formation and facilitating business transactions where they make sense,” said Tropp, of Ropes & Gray.
A financial slowdown could, however, bring an end to SPACs’ ongoing surge by reducing the appetite for new listings and corporate dealmaking. This happened after the 2008 financial meltdown, when the flow of SPAC IPOs slowed to a trickle following a banner year in 2007.
The performance of SPAC IPOs is dependent, in large part, on the market, said Ellenoff, whose firm added these offerings to its portfolio of alternative financing methods in 2002.
“If the market craps out the way it did back in 2008,” then the SPAC IPO market will contract, rather than fall off a cliff like it did at that time, he added. “You have a solid grouping of serial SPAC sponsors who come back to the market regularly and have been very successful. So I don’t think they go away.”
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