Latin America has built more and more unicorns in a short time (the most recent ones include Clip, Creditas, Kavak, Loft, VTEX). As tech companies mature, founders look at the gleaming billboards in Times Square and think of the obvious way to generate liquidity for investors and the company: ring the IPO bell. It is also possible to do a direct listing (when a company launches its pre-existing shares on a stock exchange, but without hiring banks to underwrite the transaction, as in an IPO).
Yet, a new instrument (created about 20 years ago in the United States, but which only gained the spotlight last year) wants to offer Latin American startups a faster way to list and create new shares in the U.S.: the SPAC (Special-Purpose Acquisition Company). So far, no Latin American technology company has been listed through a SPAC, but four newly launched vehicles, Alpha Capital, Valor Latitude, SoftBank, and DILA Capital, have already begun the hunt for the first deal. LABS reached out to these SPACs to talk about their search for target companies in the region. Only SoftBank declined to comment on its $200 million SPAC launched in January this year.
The SPAC, also called a “blank check company,” provides private businesses a path to enter the public stock market more quickly than an IPO process — it takes a few months, while an IPO can take more than a year — by using mergers and acquisitions (M&A) regulatory arbitrage, which is simpler than the rules for listing a company on the stock exchange. In other words, you trade one set of regulations for another.
But how does it work? Generally, SPACs are managed by corporate leaders, successful entrepreneurs, and well-known investors who create a company without any actual operations. These managers (also called sponsors) take the SPAC to the market through a regular IPO in a process coordinated by investment banks. This process, as a whole, is easier since the company does not have a history to audit. It was born with a single purpose: to merge with another company.
Investors, generally unfamiliar with LatAm startups, believe in the sponsor’s experience to filter the prospective companies and make a good deal. Investors buy SPAC shares, traditionally for $10, despite not knowing with which company the SPAC will ultimately merge.
After the IPO, the SPAC starts looking for a target company that wants to go public. Under the regulation, the vehicle can extend its deadline but, generally, the SPAC has two years to find a company and make a deal.
If that doesn’t happen, the money goes back to the investors and the SPAC dissolves. But if the SPAC merges with a company that wants to go public, that target company gets its spot on the stock exchange and the SPAC ticker turns into the target company’s name.
Since SPAC follows the M&A rule, it can only merge with a single company. After the transaction, investors in the blank-check firm receive shares in the newly listed company and SPACs managers usually get 20% of the shares. To take other companies to the public market, managers can create other SPACs vehicles, numbers II, or III, for instance. This is the case with Union Acquisition Corp, which is not especially focused on technology but is on its second SPAC with a company in the region.
The SPAC of a traditional company: the case of Procaps Group
Union Acquisition Corp. II is a $200 million SPAC led by American businessman Kyle Bransfield and Uruguayan politician and millionaire Juan Sartori, which has already chosen its target company: Procaps Group, a Colombia-based pharmaceutical firm. This is their second SPAC for Latin America. The first Union Acquisition Corp, exited the Argentine biotechnology company, Bioceres in 2019. Today its shares sell for about $15.
“We learned a lot from that first SPAC,” said Daniel Fink, COO at Union Acquisition Group, in an interview with LABS. “Now, this one is the first vehicle where we raised a private investment in public equity (PIPE). When we did that deal we were ahead of our time; people didn’t know what a PIPE was, so we’re incredibly proud we raised a PIPE from such quality investors.”
The so-called PIPE mechanism gives a SPAC the ability to add other investors if the amount needed to merge with the partner is more than what the SPAC can afford. For example, in the case of Union Acquisition Corp. II, the SPAC has $200 million. But if the merger with the target company requires $500 million or $1 billion, the vehicle would bring together other investors who are not going into the SPAC, but who invest in this PIPE formula with the sponsors.
In this case, the investors give a letter of intent to the sponsors. If the Securities and Exchange Commission (SEC) approves, the money is released to the SPAC. This money goes directly into the merged company’s stock and gives the SPAC more flexibility. It can choose to do a merger of $800 million, $1 billion, or even $5 billion, for example. Recently Grab, a Singaporean startup, made a deal of a $40 billion SPAC.
By that logic, Union Acquisition could take a company like Nubank public with a PIPE, not just a SPAC. While not ruling out startups, Union Acquisition claims that scrutiny of tech companies is more complicated than that of traditional companies, which have more robust records of results. Union’s new merger deal with Colombian healthcare company Procaps has been audited by Deloitte and KPMG, for example.
The Union/Procaps transaction was announced at the end of March. Investors have the right to take back their money before the transaction closes in August if they do not like the target company.
“How do you signal the strength of a deal of a stock to the market so that the market feels very comfortable and wants to stay? The first thing we did was raise a PIPE,” said Fink.
According to Fink, participating investors are likely to hold on to shares in the company because of the way Procaps plans to use the money in the region: expansion throughout Latin America.
“If the stock price trade drops before the transaction closes, SPAC shareholders could redeem in August, and we’re in the process now of getting the right PIPE shareholder base in to potentially replace any SPAC shareholders who have liquidity constraints.”
Union takes shareholder comfort seriously, which is even more essential when you’re dealing with new or unfamiliar investment vehicles.
“Over the next year we’re focused on getting Procaps fully compliant with Nasdaq’s standards. It’s harder to value the prospects of tech companies — they’re a bit murkier. Procaps, which has been around for 40 years, comes with the accounting books and a track record. It’s not as much of a concern whether the company is ready for this.”
Despite concerns that SPACs companies didn’t go through all the scrutiny of an IPO, which takes longer to complete, Ruben Minski, owner of Procaps Group, said the scrutiny that SEC placed on his company was exactly the same as a regular IPO.
“They put us through the same level of detail as a Nasdaq IPO filing,” said Minski. “We were thinking about an IPO in 2023, but the SPAC is a quicker way to enter the market for public funding and visibility. We shorten our time to the market by 18 months, and we get the same results. Union had such a great reputation and great partners, and it felt like a great opportunity.”
Why is the SPACs market for startups the hot thing now?
According to Alpha Capital CEO and co-founder, Rafael Steinhauser and DILA Capital sponsor Alejandro Diez Barroso, the lack of capital for late-stage investments in startups in the region forces unicorns to enter the public stock market. Steinhauser argues that, in addition to the lower cost of a SPAC exit compared to an IPO, there are other advantages as well: greater flexibility, and less time in the SPAC eliminates the risk of the public offering price (POP), an effect that many technology companies experience when they go public.
The POP is the difference between the launch price and the value at the end of the first day. In some recent cases, the volatility caused by the coronavirus pandemic dashed investment expectations.
“The company that goes public sells a piece of it for a certain amount of money. But the other party is interested in making a good deal,” said Steinhauser. “Then the share price is set and you have this so-called POP effect and the share price drops. Last year it was 39%. In a SPAC there is no such thing. You agree on a fair price for both parties and that’s it.”
In addition, Steinhauser said that while forward-looking statements are not allowed for a company preparing for an IPO, there is no such restriction in the SPAC.
“If you’re a high-growth company, the main interest is your future — not your past. You talk about what you’re going to accomplish with the money, that you’re going to do M&A, expand internationally, hire more people, or create a fintech within the company,” said Steinhauser. “That’s what’s interesting, not the past. The value of the company is in the future. That’s the central theme of a SPAC.”
In February, Alpha Capital IPO’d its SPAC for $230 million — 15 times oversubscribed. Investors offered nearly $3 billion for Steinhauser and Alec Oxenford, the Argentine sponsors.
“We had an offer 15 times the size of our SPAC, which allowed us to handpick our investors,” said Steinhauser. “That’s very important because we wanted investors who would be present at the IPO and at the De-SPAC (when the merged company goes public) and then the day after. We wanted committed, long-term investors, not speculators, because that path is dangerous.”
Setting a high SPAC bar
Generating a big deal with a big company is more than just a desire to be top dog. It sets the example, the tone, and the possibilities for future SPACs.
“We want to do a big deal with a big company. If not, we won’t do it. Because it’s not just for us. Since we are the first tech SPAC in LatAm, it has to be very good. We don’t want to cramp SPAC’s style, or it will be difficult for the sector’s future,” said Steinhauser.
Alpha Capital is interested in startups capable of replicating its business model globally — meaning digital products.
“Companies that deal with physical products rely on investing in raw materials, maintaining inventory and shipping,” said Steinhauser. “When you work with digital products, you build a platform. If it’s good, it can work for the whole world. So we like e-commerce marketplaces, edtechs, fintechs, proptechs, and SaaS.”
In addition to these sectors, Valor Latitude, which has Valor Capital Group’s Scott Sobel among its founders, is also looking for logistics and healthcare technology companies to merge in the region. Statistically speaking, these SPACs will most likely find their target companies in Brazil, since 70% of the technology companies in LatAm are Brazil-based.
Meanwhile, Alejandro Diez Barroso, of Mexico‘s DILA Capital, says that his $55 million SPAC, which IPO‘d on Tuesday, is focused on companies in Spanish-speaking Latin America. The SPAC may also include companies inthe U.S. state of Florida, which has a strong presence of Latinx entrepreneurs.
Because he has been investing in venture capital in the region for 15 years, Barroso said that it makes sense for the company to merge with a startup from the region, but he does not rule out mergers with more traditional sectors.
“We believe this opportunity is unique given the size of our SPAC,” said Barroso. “We believe a $50 million SPAC is small in size compared to the rest, which gives us a lot of options to look for companies that are not so big. Other SPACs are larger, and they’re targeting larger companies.”
Mario Mello, CEO of Valor Latitude, said there is room for all competing SPACs in the region. Valor’s $200 million SPAC made its IPO on Nasdaq in early May.
“I’m not saying there’s a good SPAC and a bad SPAC,” said Mello. “Some investors like infrastructure, others prefer fintechs. You have to align investors. There’s room for a lot of people. Especially in a market that doesn’t have the same level of competition as the U.S. market.”
Investor enthusiasm for SPACs may have waned with the SEC’s increased scrutiny of transactions after the recent poor performance of shares in some vehicles in the U.S. market. Bank of America (BofA) data shows that in the first quarter of 2021, there were 296 SPAC transactions — more than the 248 deals in all of 2020 — but far fewer than the 10 SPAC transactions in the second quarter (up to late April).
BofA was involved in the Alpha and Valor Latitude deals.
According to Pedro Pereira, head of Latam Technology in Investment Banking at Bank of America, the global market saw an average volume of almost $10 billion weekly of global SPACs, but the number has dropped below $1 billion.
“This shows that investors want to see a bit more result from business combinations, what we call De-SPACS — the cash that these vehicles have raised actually being used to buy and merge companies,” said Pereira.
Pereira said that while there is a desire of investors to believe and buy SPACs success stories with savvy sponsors behind them, the universe of eligible managers has shrunk.