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Analysis

Private equity and SPAC readiness: 6 key considerations

Preparing portfolio companies for a SPAC merger

The rise of special-purpose acquisition company (SPAC) transactions is pushing attention to the private equity (PE) space, where promising portfolio companies present opportunities for strong sponsor incentives and investor returns. But if PE managers want to make the most of SPAC opportunities, they may need to help their portfolio companies prepare for the road ahead.

How private equity fits into the SPAC revolution

The acceleration of SPAC transactions and the desire to complete deals with target companies means many venture capital or PE-backed portfolio companies may be public sooner than previously expected. Though the number of companies that are immediately ready for a SPAC transaction may be low, demand is high. The same is true for the advisers and other external service providers who are typically involved in a SPAC transaction.

Not all target companies are ready for the de-SPAC process that merges a private company with a publicly traded SPAC. They may have a promising business and an experienced management team but lack awareness of the key milestones and action items necessary to complete a deal. If PE managers are expecting to take advantage of SPAC opportunities, they may need to help their portfolio companies anticipate impediments.

What the SPAC revolution means for private equity firms

Asking the right questions

PE managers need to understand a principle: Speed matters. The pace of SPAC activity is pressurizing the deal environment. PE firms should be careful not to let themselves, and especially their portfolio companies, get squeezed by the supply of capital into a process that affords little room for error or mistake. Consider as well that SPACs are shifting their gaze to international targets, where the challenge of executing a de-SPAC transaction is even more complex.

All PE firms need to be asking tough questions about the SPAC readiness of their portfolio companies. A checklist would include the following:

SPAC and private equity: Opportunity or competition?

Amid all these considerations, PE firms may need to think about how SPACs present additional opportunities to monetize their portfolio and become more competitive, since SPAC candidate companies may also be PE portfolio targets. The kinds of companies that attract PE funding and support may well choose the SPAC route instead. PE firms can make a compelling argument that SPACs can fast-track the public company launch, but it can’t replace the essential growth process that great PE managers design.

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