Podcasts  •  July 12, 2022

The State of SPACs with Craig Clay, DFIN's President of Global Capital Markets

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"The Insider by DFIN" is a series of video interviews featuring the latest trends, topics and key perspectives on the global capital markets.

Join DFIN President of Global Capital Markets Craig Clay as he reflects on the state of SPACS in today’s market.


Craig Clay

President of Global Capital Markets, DFIN


Dana Barrett - Welcome to the Insider by DFIN. I'm Dana Barrett - and today we're here to talk about the state of SPACs. Joining me for the conversation is Craig Clay. He is DFIN's President of Global Capital Markets. Good to see you.

Craig Clay - Nice to be here, Dana.

Dana Barrett - So, I want to talk about the state of SPACs because I know there's been a lot of change and there's a lot coming down the pipe potentially. Before we get into that I'd love to get a little bit of your background, how you, kind of got started in this world and where you are now, what you're doing for DFIN?

Craig Clay - Sure. I've been in this industry a long time, so 20 plus years. It's a great niche space of supporting deal makers, deal teams, public companies, private companies, investment banks, and private equity. So it's been a great time riding the capital markets waves and troughs and currently, I'm President of the company as you mentioned and leading our transformation to really focus on software.

Dana Barrett - So it's specifically software for all of these kinds of things you just mentioned.

Craig Clay - Absolutely.

Dana Barrett - It's a whole suite of products.

Craig Clay - Absolutely.

Dana Barrett - Yeah. SPACs obviously are relatively speaking, somewhat new, although I guess it depends on your perspective on what new is, right? I don't know that everybody knows what a SPAC is, so before we start to talk about the state of SPACs, can you just give a little background? What is a SPAC? How did this whole thing get started? Just kind of catch us up.

Craig Clay - Sure. So a SPAC has been around for a long time. It used to be for referred to as a blank check company.

Dana Barrett - Okay, maybe it's the terminology then, okay.

Craig Clay - And so SPAC means Special Purpose Acquisition Corp. So the initial entity is a SPAC, so it's an acquisition corporation, so it's set up with the intent of acquiring a company.

Dana Barrett - Right.

Craig Clay - So it's had a story, history, ups and downs, not being used at times, but post-COVID, the SPAC was sort of reborn as the backwards IPO. So you had a lot of management teams and money raising a SPAC, filing and pricing a SPAC for a purpose of healthcare, biosciences, or industry or payments. So you had just a lot of SPACs that came to market in 2020. You had some celebrities that were associated with SPACs, and 2020 and 2021 saw an enormous number of companies come to market and then acquisitions that were made by those companies and it certainly brought a renewed attention to the product.

Dana Barrett - Okay. So I guess I should stand corrected and I think that's what I was thinking about more that they became so popular, not so much...

Craig Clay - Yes, they became super popular.

Dana Barrett - Okay and so is it right that the company, the SPAC, goes public and then acquires the target company?

Craig Clay - That's correct.

Dana Barrett - Okay. So that's the trick there.

Craig Clay - Called the De-SPAC. So the unSPAC-ing of the SPAC.

Dana Barrett - Okay, say that three times fast.

Craig Clay - Yeah, right

Dana Barrett - Okay. So, I'd like to sort of understand how that boom happened, why it happened, and also where are we now with SPACs?

Craig Clay - Right. It was the euphoria and the efficiency of the capital market coming out of COVID. So it was monetary policy, it was an enormous amount of cash that needed to be put to work, and they polished off the blank check SPAC product, which existed, and they really made it something that was powering the market. A lot of SPACs came to market, a lot of SPACs announced De-SPACs and started to complete them. It became very much in vogue. If you were a successful business person or even celebrity to put together a SPAC to go into the market, and it honestly created a lot of public companies in the United States where many of the things we've done previously, the jobs act hadn't done that. So in that respect, it was creating more public companies for people to invest in.

Dana Barrett - Well, so what's the advantage on the company side, not the SPAC side, but I’m the company who’s potentially going to be De-SPACed into this whole thing, if I’m saying that correctly, what’s the advantage for me versus just going public on my own?

Craig Clay - Right. There are a couple of advantages, one is time, so you have one person, one entity that you’re dealing with just the company, the SPAC, that’s acquiring you, so in that respect, it’s a more simplistic transaction and it can happen more quickly. An IPO is an entire process. You know, there’s deal teams. You don’t know the outcome. That happens over a much longer period of time. So it’s a choice. It also is an opportunity for the SPAC to acquire company that may be too early to go public. So where in the past they may have sought financing or investment, they can be acquired by the SPAC and there are a lot of success stories out there. There’s others that people would point to that aren’t, but management teams have raised money, they’ve given good guidance to young companies and are doing well.

Dana Barrett - Can you give an example of maybe a company that we’ve heard of that went public this way and was successful?

Craig Clay - Yes. So you’ve heard about WeWork. They had a storied run up to an IPO that didn’t happen. You can watch about it on Apple TV.

Dana Barrett - Indeed.

Craig Clay - They were a part of a De-SPAC, so a De-SPAC ultimately acquired WeWork and through that process, WeWork is now a public entity.

Dana Barrett - Interesting. Well, everybody’s heard of them to your point, since there’s TV shows about them now. Yes, interesting, but there, obviously as you said, are some ones that don’t go quite as well, but that’s true for IPOs.

Craig Clay - Right and so when you actually compare the IPO total 2020 - 2021 return, to the SPAC that actually acquired an entity, there’s not a tremendous difference. I mean, the market at this point is battered down and if you look at it, you’re going to really have to look at the underlying quality of the company which is why companies are public to allow people to have information that we provide through our great software products and for people to analyze it, investors to analyze it, individuals to analyze it, and people to make their own decision.

Dana Barrett - Right, all right, so boom happens, where are we now?

Craig Clay - It's a challenging place for the SPAC product. So it started in 2021, at the end of ‘21 with just the economic headwinds. So financing became more difficult, most of these SPACs need a solid pipe which is a financing vehicle, the returns were challenged, the market was being challenged, the redemptions were going up, which is at a De-SPAC time you can ask for your money back versus actually completing the De-SPAC, so the cards were stacked against SPACs. It's sort of the end of ‘21. It didn't come into ‘22 and the entire market has certainly been challenged with geopolitical issues, monetary policy change, just a lot of headwinds that have impacted the market in total. Then there is also a lot of activism at the SEC about proposed rules that would change how SPACs have operated.

Dana Barrett - So let's talk about that because that seems like a major change, right? The SEC's going to start cracking down, so why are they interested in sort of cracking down on these and what's the potential impact?

Craig Clay - There's a lot that's been written about it. They want to protect investors, so everything that they're doing is in the name of protection and additional transparency. The two sides of the coin would say there is transparency because every piece of information is out there, even the forward-looking projections. You're free to understand that and engage it the way that you would. The SEC's proposing that those forward projections be removed. They're also proposing some liability changes to the advisory deal team. So it ostensibly, if passed would make it more like an IPO, sort of would remove the distinction between the two product classes.

Dana Barrett - Yeah. I'm sort of not sure what would be left, right. If they did go through with all of that regulation, then is there a difference at that point?

Craig Clay - There would be, because you could still raise money to then go look for the asset.

Dana Barrett - You could still bring the company in early.

Craig Clay - Right, would still be the same. The disclosure would look more like an IPO. So sort of the advantages of speed would be impacted.

Dana Barrett - Okay, so you lose the speed, but you also still could acquire that company when it was earlier than it would normally IPO, so that advantage would still be there, so it's not like it loses all of its advantages.

Craig Clay - Correct, and again, the capital market is super-efficient, they're going to find a way. So it just wants to know what rule is and then the market is going to find a way to do deals, and there are over 600 public SPACs that are looking for a target today. That's a lot of entities that are out there looking to acquire which is great in this market. If you think about valuations being down both public and private, that's a great opportunity. So a company may need that financing through a SPAC, they may need that transaction, and then from a public company perspective, it gives us as individuals the opportunity to invest or not.

Dana Barrett - So the ones that, the 600 that you mentioned that are already public and looking for their target companies to acquire, they have a timeline, correct?

Craig Clay - They do. 18 to 24 months. So most of them are early in that process because most of them were public in ‘21, some in ’20. So some are sort of maybe getting to a midpoint, but they have a little bit of time.

Dana Barrett - Okay, so are there new deals, new SPACs still happening or is everything on hold right now while the SEC is...

Craig Clay - Very few.

Dana Barrett - Okay.

Craig Clay - It has closed the door to most news SPACs.

Dana Barrett - Okay, so the 600 that are out there are like if you want to be acquired by one, this is the time.

Craig Clay - This is the time. There's a window. There's several investment banks that have announced committees that are going to review SPACs that have announced they're not going to participate in new SPACs because of the potential change in liability. So everyone's sort of, I think struggling with the volatility, the unknown, and so as soon as that's clarified, the market will find its footing.

Dana Barrett - So, is there, what's happening now at the SEC? Like do we have a timeline for when this is going to come out?

Craig Clay - They're in the comment period, so they're seeking comment on what they have proposed and there was a lot of comments from every spectrum. Lawyers, investment bankers, individual investors, so there's a lot of comments and some of them center around how can you tell what was the general market? I mean, the market changed dramatically from ‘21 to ‘22 and what was the problem with the potential SPAC? So where do you put the attribution is some of the debate going on, which is the entire market's impacted, it's not just that it was a SPAC potentially that the valuation is down.

Dana Barrett - Was there something that sort of triggered the SEC to want to crack down on this? Were there certain deals that went bad that they were like, this is no good, we can't allow this?

Craig Clay - I think it's the general euphoria. You know, I mean, there were a lot of SPAC. There were a lot of SPACs, it became super popular. There was a lot of attention, there was a lot of media attention, there were celebrity attention. They've had a lot of commentary and I think it was the need and the desire to look into okay, if something's driving that much euphoria, let's take a second look at it and make sure that we have the transparency that we need.

Dana Barrett - Are investors looking at this stuff differently now across the board? Or are they saying, well, we're not that interested anymore, we'd rather just go straight IPO or?

Craig Clay - I think that actually happened at late ‘21. I think in that respect, the SEC's late, so the market was doing that anyway. Again, that economic headwind started and then really accelerated in February and beyond. I think the market was taken a critical eye before that. I think the market had, the market's efficient. The market had done what the SEC is now sort of looking back in thinking about are there any protections that need to be in place.

Dana Barrett - Right. Like the deals that just didn't work, didn't work for a reason and the market responded to that. It's the same reason they got popular, right. Some did well and the market responded to that.

Craig Clay - Absolutely.

Dana Barrett - Yeah. I got it. I got it. Is there anything else you feel like we need to know about the state of SPACs right now, or where things are trending in order to sort of operate?

Craig Clay - I think the market's in a wait-and-see mode for the two big things: which is the SEC, what is the SEC final proposal or rule will be,. Then the second is just the economic surety, so when can we find a place where we are not in this extreme volatility and the capital market will react to that. There still is a lot of money on the sideline, a lot of money that wants a great return and it's going to find a place to be put to work.

Dana Barrett - When you mentioned that we got more public companies when this whole SPACs boom started than we had with any other thing that sort of had been attempted to try to get more public companies. If that goes away again, do you feel like this is just going to be one of those cycles where the regulations loosen up, it becomes popular or do you think it'll level out?

Craig Clay - It would appear that if the SPACs diminished certainly to the level they are right now, which is negligible that you're not going to have that sort of rush of public companies. I think it's great for people to have more to invest in and more to analyze. You certainly have to have the transparency of understanding what is behind the company to be able to make a smart decision, but it's great to have more public companies in the United States. It's great to give access to investors to those companies, versus it just being something that is invested by VCs or private equity. It's great to open up the number of people that can invest.

Dana Barrett - Yeah. I want to kind of wrap it up by bringing it kind of back to DFIN and what you all do and clearly, you know a lot about the state of SPACs and what they are and I learned a lot, but also like how does that impact the products you guys are promoting and selling and the ways you're helping your customers?

Craig Clay - Sure. A SPAC, have you go center this to the life cycle, a SPAC can use our Virtual Data Room as they raise their pipe. The SPAC certainly uses us for the services of being listed, of being taken public, of pricing. We have disclosure tools that they're communicating with the SEC. We then often have them using our Virtual Data Room as they pursue an acquisition. So talking to the company, having them put their documents etcetera in the Virtual Data Room, which is powered by artificial intelligence which is giving you insights into what's in there to make sure that they're making a smart decision, and then obviously the De-SPAC is another transaction which is using our ActiveDisclosure product, our disclosure tool to communicate with the SEC.

Dana Barret - So essentially, there's the host of tools can work for IPOs most also workforce SPACs, essentially.

Craig Clay - Absolutely. Yes, the same ecosystem supports it, so we have software and then we have our regulatory team and managed services that's helping, it's really a part of the deal team, as they help the team and make the team more efficient and make sure that everything's in order.

Dana Barrett - Right, I got it, all right. Well, I think we're caught up, at least for now. Everything could change tomorrow, but for today, we're caught up on the state of SPACs. Craig, thank you so much for your time, I really appreciate it.

Craig Clay - Thank you Dana.

Dana Barrett - This has been the Insider by DFIN, we'll see you next time.

- This has been the Insider by DFIN. We'll see you next time.