Famed hedge-fund manager Bill Ackman made a splashy announcement this week when he unveiled a $3 billion share offering for a new blank check company called Pershing Square Tontine Holdings. For private equity watchers, the excitement is just beginning.
Blank check companies, also known as special purpose acquisition companies (SPACs), raise capital from the public market through an IPO for the purpose of acquiring another company at a later date. The SPAC's manager -- in this case, Ackman's Pershing Square Holdings (LSE:PSH) -- will typically spend one to two years searching for a private company to acquire with the funds raised.
If Pershing Square Tontine Holdings successfully lists, it will be the largest SPAC ever raised. A large war chest would give the new blank check company a large list of potential targets with limited competition from other acquirers.
Ackman's new SPAC
The first thing to note about Ackman's new SPAC is that it is not his first. He previously backed a SPAC that acquired Burger King for $1.4 billion in 2012. Burger King later merged with Tim Horton's to form Restaurant Brands International and has generated a 20% compound annual return for investors since the original IPO eight years ago. The Burger King deal demonstrates that Ackman's SPAC structure can work wonders for investors.
However, Ackman's new SPAC will be quite different from his prior one. Notably, it will be targeting a late-stage venture-backed company, which Ackman refers to as a "mature unicorn." Pershing Square Tontine's IPO prospectus notes that many mature unicorn companies have developed high-quality businesses with significant scale and dominant market share. These companies have chosen to remain private but would be attractive investments for the public market.
The other differentiator will be the SPAC's size. Its IPO is slated to raise $3 billion from public investors, which would already make it the largest SPAC vehicle ever raised. In addition, Ackman's investment firm is committed to investing a minimum of $1 billion and up to $3 billion in the target company alongside SPAC investors. In other words, the SPAC will have as much as $6 billion in cash at its disposal. This cash hoard should be large enough to woo most private companies.
An attractive alternative to traditional IPOs
It is plainly clear why Ackman is raising his SPAC: He wants to take a high-profile company public. But why is the SPAC route an attractive deal for the seller?
Over the past two years, SPACs have risen in prominence as an attractive way to go public because of greater certainty in getting a deal done for the seller and a quicker route to getting public. Traditional IPOs require months, if not years, of planning and a Kabuki dance where the selling company needs to negotiate with numerous IPO investors to settle pricing and valuation.
One doesn't need to look further than the botched WeWork IPO to see what could go wrong. After a long period of orchestration and a proposed valuation near $50 billion, the offering was quickly canceled after investors balked at the IPO prospectus. Had WeWork gone the SPAC route, it could have negotiated the liquidity event with the SPAC manager directly and avoided the IPO road show beauty contest.
Bailing out private companies like WeWork may not be every investor's cup of tea, but there is some protection for SPAC investors. If the original SPAC investors do not like the deal presented to them, they can request their money back plus interest. This provision is commonly known as "redemption rights". This ability to cash out gives SPACs some interesting optionality as an asset class -- limited risk of losing money and potential rewards if the proposed company is attractive.
Several high-profile companies have recently gone public through SPACs with good results. Last fall, Virgin Galactic saw its shares surge after merging with a SPAC. In April, DraftKings utilized a SPAC to go public and has gone on to become one of this year's hottest stocks.
Given how the COVID-19 pandemic has disrupted private funding markets, the ability to quickly help a private company access public markets is increasingly becoming an attractive option.
Which company could Ackman buy?
There are many interesting private companies available for Ackman to acquire once his SPAC funding is secured.
For example, popular trading app Robinhood recently raised private funds at an $8.3 billion valuation. Real estate tech platform Compass raised private funds last year at a $6.4 billion valuation. Also, larger companies like Airbnb and Palantir have often hinted at IPO plans but have yet to pull the trigger. Ackman would have enough capital to take only a minority stake in a larger company like Airbnb, but the SPAC has flexibility for that kind of structure as well.
There are dozens of likely candidates for the SPAC to acquire, but given Ackman's ambition, expect the ultimate target company to be a household name.