Bain & Co: SPACs’ long-term role in PE hinges on performance

The growth of special purpose acquisition companies last year added more than $40bn to the pile of capital chasing buyout deals, according to the consulting firm's latest report.

This year is going to be an ultra-competitive deal environment for private equity players, thanks to the pandemic-stalled deals of last year and the surge in issuances of special purpose acquisition companies.

According to Bain & Co’s Global Private Equity Report 2021, published Monday (March 1), nearly half of the $83 billion raised for SPACs last year would compete for the same assets as buyout funds. That analysis is based on approximately 85 SPACs that closed transactions in the past five years in the Americas.

The SPAC momentum is carrying over into 2021, with 91 SPACs raising another $25 billion in January alone, according to Bain’s research.

“Whether this is something that invites a lot more regulation because there are problems with it, or whether it becomes a viable fundraising strategy that will really have legs and be a material part of the market going forward will hinge on performance,” Hugh MacArthur, global head of private equity at Bain & Co, told sister title Private Equity International.

While there is a lot of money being raised for SPACs, the companies that they buy need to make sense, he added.

“Public companies for the long term have to have the right stability, revenue profile, earnings profile to be a solid public company. It’s not every company and that’s why private equity exists,” MacArthur said.

“The quality of asset selection, the ability to do quality deals and to make that value play out in the public market is going to determine whether this is a bubble.”

Last year was unlike any other for SPACs with $83 billion raised across 248 SPACs, more than six times the previous record set in 2019, data from SPAC Insider and Thomson Reuters show.

According to Bain’s report, The Gores Group and TPG have raised a total of $4.82 billion through 11 SPACs since 2015, while Apollo Global Management raised $1.45 billion via three SPACs from the second half of 2020 to January this year. In Europe, Tikehau Capital launched a SPAC last month that will acquire financial services companies in the region. Carlyle Group, meanwhile, is taking a more cautious view on SPACs and looking at them on a case-by-case basis.

As well as raising capital via SPACs, PE firms have exited deals via listings. Blackstone and CVC Capital Partners struck the $9 billion sale of online payments company Paysafe in December through Foley Trasimene Acquisition II.

MacArthur also noted that SPACs can provide challenges to closed end funds because of their lower equity hurdle. “Theoretically, a SPAC can pay more for an asset than a closed end fund,” he said.

In the long-term, this trend might run the risk of lowering equity returns in the marketplace if many participants go down the slippery slope of competing with SPACs, he added.

MacArthur noted that Bain has seen this phenomenon before, with LPs making direct investments themselves with different equity hurdle rates than buyout funds.

“While that really hasn’t impacted writ large the market and the returns in the way that some feared it might five or eight years ago, I think the question remains open as to how big this SPAC phenomenon is going to be,” MacArthur said.

Bain’s private equity head also sees potential for more partnerships between institutional investors and private equity firms creating serial SPACs instead of closed end funds.

‘There is no new normal’

The figures for 2020 in many ways show a normal year for the private equity industry, and the buyout market held its own, Bain noted in the report. The value of deals done, funds raised, exits and the returns are generally in line with the past five years. Meanwhile, global dry powder has been stacking up for almost a decade and set another record in 2020 to $2.9 trillion, nearly $970 billion of that amount is focused on buyouts.

There were some standout shifts, however.

“One thing that jumped out at us after looking at the numbers, which we found quite surprising for 2020, was that the deal count was down by about 24 percent for buyouts alone,” said MacArthur.

Covid-19 had a pronounced impact on deal count: the number of buyouts fell to around 3,100 from 4,100 the prior year, according to the report. With the exception of the technology and telecom sectors, the number of deals slumped across the business landscape compared with the five-year average. Yet deal value last year rose to $592 billion, from $550 billion in 2019, and average deal sizes were up 24 percent to $776 million.

“What we think we’re going to find is that the conditions are ripe for a very big 2021 in deal making when you take into account deals that didn’t get done in 2020, the amount of dry powder that’s actually out there, and the very inviting credit markets with incredibly low interest rates and financial institutions willing to lend large amounts of money against EBITDA,” said MacArthur.