On August 18th, Covalto (formerly Credijusto) the Mexican digital and banking services platform, announced that it plans to list on NASDAQ via merging with the special purpose acquisition company (SPAC) LIVB, sponsored by LIV Capital, which would make Covalto the first Mexican FinTech to be listed on NASDAQ. In this post, we’ll take a deeper look at the SPAC structure, and discuss its potential advantages for LATAM based companies.
What is a SPAC?
A SPAC is a publicly traded corporation that has no commercial operations and only a two-year lifespan. Its purpose is to merge with a private business (which is still unknown at the time of IPO), complete a series of approvals, and successfully conclude the merger through a De-SPAC making the company public. Time is essential for SPACs because by the end of the two years if they haven’t found a company to merge with, they face liquidation.
SPACs have been around for decades but used to be viewed as a last resort for a company to IPO. However, in the past four years they have grown in popularity. This is driven by tier 1 sponsors now launching SPACs (Apollo, Pershing Square, Ribbit…) and high-quality/high profile companies (Multiplan, Nikola Motors, Open Lending, Virgin Galactic…) merging with them. Additionally, both investors and potential targets are getting more and more comfortable with how the economics of a SPAC work and see their advantages, particularly when volatility or uncertainty is high.
Why the popularity?
“In 2019 in the US, 59 were created, with $13 billion invested; in 2020, 247 were created, with $80 billion invested; and in the first quarter alone of 2021, 295 were created, with $96 billion invested. Then there’s this remarkable fact: In 2020, SPACs accounted for more than 50% of new publicly listed U.S. companies.” – HBR.
The IPO process is long and the outcome is uncertain, advantages to SPACs include:
- Speed and certainty, through a faster timeline and a fixed price (negotiated between the company and the sponsor).
- The ability to market the company’s projections with public investors at the moment of the merger, which is particularly relevant for high-growth companies, especially when performance may not reflect the company’s potential.
- The potential for greater proceeds than a company could achieve through an IPO.
- Added value from their management team/sponsor, which will remain as a shareholder after the merger.
Who are the stakeholders?
SPACs involve three main groups of stakeholders, who all stand to gain from the transaction in different ways: sponsors, investors, and targets.
Sponsors initiate the SPAC and are typically experienced management teams and/or a private equity firms. They convince investors to put their money in the SPAC, based on information they provide in the initial IPO, but without potential merger company candidates. Sponsors also diligently search for the companies for the attempted merger but are not obligated to stick to the information they lay out in the IPO information, such as size, valuation, industry, or geography.
This all requires upfront administrative fees to bankers, advisors, accountants, and lawyers. A successful merger will earn them sponsor’s shares, purchased at a nominal price, in the new corporation that are often worth up to 20% of the original equity raised. In addition, the successful De-SPAC will boost the groups’ reputation amongst future investors and target companies.
If the SPAC fails they must return the invested money, usually with interest paid, the administrative fees will have been for nothing, and they risk their reputation/confidence for future investors and targets.
In the case of Covalto, their sponsor is LIV Capital, which is a private equity fund manager that focuses on high-growth companies in Mexico and LATAM. LIV successfully took AgileThought, a Texas based IT services company that generates about 23% of its income from LATAM, public on NASDAQ via a SPAC last year. Raising around $80.5 million dollars.
Investors get involved with SPACs for a variety of reasons. They are mostly institutional investors, sometimes highly specialized hedge funds. The original investors buy into the SPAC before the target has been identified. There are two classes of securities, common stock (usually at $10/share) and warrants. Warrants allow investors to buy shares in the future at a specific price, usually $11.50/share. Sponsors usually issue a fraction of a warrant to one warrant per common share purchased. The warrants act as an incentive to bring on shareholders, so a SPAC that is issuing more warrants has a higher perceived risk.
After the SPAC is announced, the investors decide to move forward with the deal or to pull out. If they pull out, they get their original investment back plus interest, and they can keep their warrants. Some investors see it as risk-free return plus the chance to evaluate investing in a private company. Others have no intention of investing and just get the interest payment and sell the warrants. So, SPACs provide several risk/return profiles for investors to explore.
This mechanism does create risk for the company as it could lose the cash raised by the SPAC. However, this is being addressed by (i) the SPAC having the commitment of its PE sponsor to replace investors leaving, (ii) the attractive prospects of the target – which can be marketed with numbers – and (iii) fundamental investors increasingly investing in SPACs.
Targets are mostly startup firms that have been through the venture capital process. SPACs are an attractive alternative at this point to firms that don’t want to go through a traditional IPO, raise more capital, or sell. The advantages are the sponsors’ investors and guidance, especially if it’s an experienced group. Another advantage is that they can take companies public in the US that are already public in other countries or become part of a combination with another related company under the SPAC.
A solution for Mexican corporates looking to raise capital and IPO?
There have been at least seven SPACs in the LATAM region. However, a SPAC’s attributes are particularly relevant for markets like Mexico’s where execution risks are high and market windows tend to close rapidly (and remain so for a long time). As such SPACs offer an alternative worth considering for Mexican companies (see Mexico examples below) willing and ready to be listed, but not willing to go through the uncertainties of an IPO.
For Mexico-based companies to successfully IPO through a SPAC they need to have:
- A solid plan for the use of proceeds (even partial monetization of current shareholders).
- An appealing future trajectory (that can be marketed).
- Aligned corporate governance
- Sponsors (PE and executives) that are active and experienced in our region to structure and launch the SPACs. These sponsors can leverage the experience of their peers in the US and take advantage of public investors’ appetite.
Examples in Mexico
- The first SPAC in Mexico we are aware of was issued in August 2017 by Vista Oil & Gas S.A.B. de C.V. (Vista Oil & Gas), sponsored by Riverstone. Half of the portfolio was listed on the Mexican Stock Exchange, while the remaining 50% was listed on international markets in accordance with the applicable regulations. The offering raised US$650mn and was priced at P180/s. This vehicle was launched with the intention of raising funds to acquire one or more companies engaged in the energy sector in Mexico, Colombia, Argentina and Brazil. Please see http://www.vistaoilandgas.com for more information. .
- In March 2018, Promecap Acquisition Company, S.A.B. de C.V. (Promecap) listed the second SPAC on the Mexican Stock Exchange, also at P180/s. In this case, 79.02% of the portfolio was listed in Mexico, while the remaining 20.98% was listed on international markets, in accordance with the applicable regulations. The purpose of this vehicle was to invest resources in family-owned companies, private equity and public companies engaged in fast-growing sectors. On March 14th, 2020 they announced the US$200 million acquisition of Acosta Verde (mid-sized shopping centers, mainly in the north of Mexico) and its listing on the BMV. (Acosta Verde had previously had to abort its IPO). The stock has not traded, and remains at about P180/s, even though shopping centers have been hard hit by the pandemic.
- DD3 was a special purpose acquisition company formed for the purpose of effecting a merger, acquisition, or similar business combination and was sponsored by DD3 Mex Acquisition Corp., an affiliate of DD3 Capital Partners, run by former Goldman partner Martin Werner. On March 13th, 2020, Betterware de Mexico S.A. de C.V. (Betterware) announced that it had completed its business combination with DD3 Acquisition Corp. (“DD3”) and became the first Mexican company to be directly listed on the NASDAQ Stock Market.
Contacts at Miranda Partners