Last month we looked at deal financing in recent years across all sources, including PIPEs, forward purchase agreements, and unredeemed trust accounts. Below, we’ve restricted the sample to deals closed since the beginning of 2019. You can see that of the $14bn in equity capital deployed at SPAC deal closings, approximately 38% of it has come in the form of PIPE financing.
Part of the appeal of a SPAC listing to operating companies is the certainty it can provide on valuation and committed capital. The IPO market can be volatile, and an issuer won’t know how much money it will raise or at what price until the day its IPO prices. But a company that signs up PIPE investors alongside a SPAC deal can feel assured of a minimum capital raise and a valuation agreed upon in advance.
PIPEs are also a great way to demonstrate committed equity capital at the time of a transaction announcement. Even with how hot SPACs have been the past few months, sponsors face a lot of work moving shares after a deal announcement if their common stock isn’t trading materially above cash in trust. Most investors don’t want to be the first to make an equity commitment, and it’s easier for a fund to make an investment decision if it can piggyback off the due diligence of a name-brand investor that has signed a PIPE commitment in advance.
We always tell first-time sponsors that covering a majority of their deal’s minimum cash condition with a $10 PIPE investment is the single most important thing they can do to support their transaction. So we wanted to examine the relationship between PIPE financing and deal outcomes. Below, you can see all the closed SPAC deals since the beginning of 2019 that included a PIPE investment, with the PIPE amount on the x-axis and the current market price on the y-axis.
GSAH/Vertiv ($1239/$16.85) omitted for visibility
The correlation is incredibly powerful, with larger PIPEs being associated with superior outcomes.
And what about for pending deals?
CCXX/Multiplan ($1300/$11.03) omitted for visibility
The relationship holds, although it’s less powerful — which makes sense given the $10 floor under weaker deals and the fact that there’s been less time for price discovery. We’ve explored the relationship between SPAC size, performance, and increasing sponsor quality in the past. Roughly speaking, larger SPACs have produced better outcomes on both the front and back end, and good outcomes have helped bring more great sponsors into the fold. That phenomenon is connected to the increasing size of both SPAC deal values and PIPE investments. And as you can see below, PIPE investments are clearly getting larger.
But SPACs and acquisition targets are getting larger too, so we wanted to look at PIPEs through another filter. We plotted all the PIPE investments below against the initial trust account values for each of those SPACs.
You can see that historically it was rare for SPACs to raise more than their trust account in a PIPE investment, with only four such deals occurring prior to 2020. But with the confluence of exciting deals, great sponsors, and strong markets, there are seven pending deals right now that have PIPE commitments for greater than 100% of their trust account.
Later this year we’ll explore two offshoots of this week’s study: the trading performance of SPAC deals as compared with the fraction of their minimum cash condition that was met via PIPE commitments, and the shift in SPAC enthusiasm to venture-capital style deals that trade on a multiple of future revenues.