As financing the acquisitions of SPAC became Wall Street’s new favorite trade

For most current investors, it’s literally a “PIPE dream”.

PIPEs, or private investments in public capital, are mechanisms for companies to raise capital from a select group of off-market investors. But as PIPEs unfold more and more along with an increase in SPAC mergers, a larger group of fund managers are seeking access to this security, with limits on who and how much they can invest.

Although SPACs, or special-purpose acquisition companies, will leverage public procurement to raise capital to fund a future acquisition, PIPEs are assigned to a small group of investors. The managers of the funds participating in the PIPE will sign a non-disclosure agreement, with commercial restrictions, and it will be transmitted to them through a proverbial “wall” where they will be provided with material and non-public information from the SPAC on what purpose. they are. looking to acquire. They are then allowed to choose whether or not to invest in the SPAC’s IPO (or sometimes at a discount) and mount what they expect to be popular when this acquisition is announced.

Bankers from several companies have reported to CNBC that they have recently received increased interest from investors looking for future PIPE opportunities.

“Many of these transactions work very well and have been well received during the post-announcement period,” said Warren Fixmer, who heads SPAC Equity Capital Markets at Bank of America. “So the alpha generation it represents obviously attracts a wider group of investors.”

In 2020, PIPEs generated $ 12.4 billion in additional capital to help fund 46 SPAC mergers, according to data extracted by Morgan Stanley. Their data examined SPAC deals with valuations in excess of half a billion dollars. On average, PIPE capital added nearly three times its purchasing power to the SPAC, Morgan Stanley said. The data show that for every $ 100 million raised through a SPAC, a corresponding PIPE added another $ 167 million.

Some of the largest PIPEs have surpassed $ 1 billion and have been committed in recent months. The latest was announced Monday morning, with the acquisition of Fighty Trasimene’s Alight Solutions, Acquisition Corp., which included a $ 1.55 billion private placement. Another Foley SPAC used a $ 2 billion private location, announcing an agreement in December to buy Paysafe. SPAC, Hathosophia V Social Capital of Chamath Palihapitiya, is deploying a $ 1.2 billion PIPE to acquire SoFi. In addition, Altimar Acquisition Corporation announced an agreement with Owl Rock and Dyal to make public the alternative asset manager combined with a $ 1.5 billion PIPE.

The most committed PIPEs will be lagging behind in the SPAC OPOs, i.e. if 2020 was the year of the SPAC rise, 2021 and 2022 will be the time when these vehicles will merge.

Morgan Stanley data showed that there is still more than $ 90 billion in “dry powder” to be deployed in acquisitions over the next two or fewer years. This implies that a total of $ 117 billion of PIPE capital is expected in relation to SPAC mergers during this time period, Morgan Stanley said.

In this context, potential PIPE investors are massively asking for placement agents and seeking to be included in the financing of these mergers, bankers from three separate companies told CNBC.

The increasing prevalence of this product raises concerns about the possible misunderstanding among the wider cohort of SPAC investors about the performance of these investments.

“There are two generic losers, or people at risk: the first is existing shareholders, but the second is the perception of fairness in our capital markets,” said Harvey Pitt, former chairman of the Securities and Exchange Commission. “People who aren’t aware of the disclosure, people who can’t take advantage of these price discounts, and people who see the power of their holdings was degraded by virtue of what we call dilution. ”

Investors in PIPE usually receive their securities at a discount at least at market price and sometimes even get shares below the IPO. Approximately one-third of the 2019 to 2020 merger cohort SPACs that issued shares in PIPEs sold those shares at a 10% or higher discount on the IPO, according to a recent Stanford Law SPAC study School and the New York University School of Law. This can ultimately be dilutive for investors who acquired shares on the IPO’s IPO.

A key question, Pitt said, is what types of disclosure investors receive in PIPE compared to the market in general. While he points out that it would be “entirely appropriate” for SPAC to share possible merger plans or things of this nature, other details about the company’s future could be a grayer area.

But proponents of PIPEs say they serve as a validation signal to the market and therefore can improve performance. Those 2020 SPACs that included PIPEs had an average return of 46%, a month after their bids closed, according to Morgan Stanley. Those who did not have PIPEs recorded earnings of less than half (21%) during the same time period.

But once PIPE investors are eligible to sell, this can put pressure on the stock as it expands. It usually occurs in the weeks following the closing of a SPAC agreement, much shorter than the typical IPO blockade.

Because of these factors, PIPEs could be an area that exerts greater regulatory control this year as investors begin to better understand the rules and the potential financial impact around these values ​​in relation to equities. SPAC public schools.

“It’s not illegal to participate in one of these deals, but there are, say, minefields throughout the process that could turn what might be legal into something illegal or cross that line,” Pitt said. , who currently serves as the CEO of Kalorama Partners, a consultancy. “That’s why there needs to be control and that’s why there’s control over those transactions.”