There are few people alive who’ve worked on more SPAC deals than attorney Doug Ellenoff. His experience extends across transactions of all sizes, industry sectors and international borders.
If you’ve ever pulled up a few SPAC regulatory filings from the SEC’s website, chances are you’ve seen the name of his firm listed as counsel for one blank-check firm or another.
So when you want an expert perspective on the state of the SPAC market, both domestically and internationally, Ellenoff is the man to call. He is also a featured speaker at DealFlow Events’ upcoming SPAC Conference Europe in London.
DealFlow caught up with Ellenoff recently at his New York City office a few blocks south of Central Park, situated diagonally between Carnegie Hall and the Museum of Modern Art. It was a crisp morning in early autumn, and we wanted to know what Ellenoff thought about the current and future state of blank-check firms. We wanted to hear if the SPAC market will rebound, or whether blank-check firms will come to resemble the fallen, wind-blown leaves scuttling like crabs along the sidewalk in Midtown Manhattan.
Ellenoff is bullish on U.S. SPACs, though cautiously so while the market remains in flux. Attractive targets in Europe and elsewhere should also continue to provide opportunities for SPACs, which Ellenoff sees as a critical component of healthy stock markets throughout the world. SPACs open doors that would otherwise be closed to many companies, he says. Done correctly, SPAC deals are lucrative for all parties involved.
What’s been missing for the last two years, perhaps, is a bit of perspective.
“The business in Europe has been episodic,” Ellenoff says. “There have been times where, in the UK, when the US has ebbed, it has flowed. In the UK, I’d say there was more uptick and interest on stocks in England because of the last two years of growth in the US market. Similarly in Italy, there’s always been a cottage industry SPAC business. Some of these people will be at DealFlow’s SPAC Conference Europe (December 7-8, 2022 in London). There are a limited number of deals being done in Italy, but they tend to be done by well-known entrepreneurs and business people in those markets. At one time you had a lot of business on the Euronext in Amsterdam. You’ve heard some rumblings about new rules, like in England, in Hong Kong and Malaysia. Certainly in Canada, but it doesn’t come close to rivaling what’s been done in the United States.”
To no small degree, regulatory proposals put forward by the SEC have had a chilling effect on the domestic SPAC market, while a new excise tax on stock buybacks and redemptions has been seen by critics as a direct shot across the bow – aimed at SPACs. On the flip side of the coin, regulators argue that their efforts are calculated to reign in an over-exuberance that dominated SPAC action for the last two years.
Ellenoff stays out of this fray, predicting a return to a more stable SPAC market, as was seen prior to 2020.
“I’d frame it that there’s going to be a reversion to the mean, where we were about three years ago.” He says. “The last couple of years were extraordinary, and whether or not we ever get back to any level like that again is anybody’s guess. It probably won’t be any time soon, but I think we’ll go back to a better SPAC market, more like the market that existed in 2019, though certainly far less than what was done in ‘20 and ‘21. The underlying necessity of a healthy stock market is essential and clear to me as always. I think the nature of SPAC acquisitions over the next 24 to 36 months is going to be much more in line with what SPAC acquisitions looked like prior to 2020, which were more private equity-like transactions than Series C and D financings into aspirational venture deals.”
Even the much-ballyhooed participation of celebrities jumping on the SPAC bandwagon did not change the overall quality of transactions that SPACs were doing, he adds. Celebrity involvement may have attracted investor interest in one SPAC over another, but celebrities did not fundamentally alter the deals those SPACs ultimately made, Ellenoff argues.
“So with or without celebrities, I don’t think that’s the controlling reason why SPACs will do a different type of deal going forward.”
Hopping across the Atlantic, while the rules and regulatory minutiae vary across Europe, the underlying fundamentals that define quality deals abroad will not differ much from quality deals done stateside, the attorney says.
“We do a lot of business overseas, particularly in the Asian markets, in Israel to some degree, Latin America, and we actually did a Scandinavian SPAC that’s looking to do a deal up there,” Ellenoff says. “The same rules of engagement apply. Investors in US SPACs who support business combinations no longer want pre-revenue venture deals. The same will hold true whether it’s a European target or elsewhere in the world. Sponsors are going to be looking at more mature business models with a greater visibility of revenue and EBITDA.”
Although deal sizes may be smaller in Europe, Ellenoff points to the fact that equity values of US-based mergers are beginning to shrink.
“If you look at the size of the overall SPAC business combination, enterprise values in the last six months, they’ve already started to get smaller,” he says. “And so I would fully expect for those SPACs that are already funded, that are looking to do business combinations next year, or even new SPAC IPOs next year – over the next couple years, the overall enterprise value size of those deals will be smaller.”
Going forward, Ellenoff predicts deal sizes in the range of $500 million to $1 billion, with billion-dollar-plus deals becoming more of a rarity.
As for SPACs in Europe, the times are changing as investors become savvier, which is to say, as they catch up to U.S. investors who’ve been playing the SPAC market for years and arguably possess a much greater understanding of deal complexities.
For a time, there was a perceived advantage for a SPAC listing on the Euronext in Amsterdam.
“The regulators were less focused on this issue in the U.S. that we call pre-identification,” Ellenoff says. “So in theory, a SPAC could have identified the target even before doing the IPO, so long as they had not entered into a letter of intent. In the United States, of course, you cannot engage in substantive discussions with a target before you launch your IPO.”
The negative that investors learned, which is why the market moved away from there, is the lack of liquidity. So when business combinations ultimately got done, people were dissatisfied with the illiquidity of their positions, Ellenoff explains.
Still, for all the market and regulatory turbulence that has buffeted blank-check firms over the last year, Ellenoff says SPACs continue to serve a very real and essential function in world capital markets.
“My personal belief has always been that there are too few public companies in most capital market communities around the world. And there are too few underwriters willing to underwrite traditional IPOs. And consequently, we welcome more SPACs being floated on any listing, on any exchange throughout the world because we think it’s good for the markets. We think it’s healthy.”
Attorney Doug Ellenoff, a partner with New York-based Ellenoff, Grossman & Schole, has been involved throughout the life cycle of numerous registered public offerings, including more than 100 financings and, with other members of his firm, hundreds of private placements (PIPEs) into public companies, representing either the issuers of those securities or the registered broker-dealers acting as placement agent.
Along with other members of his firm, Ellenoff has been involved at various stages with over 370 registered SPACs offerings. In addition to his IPO experience with SPACs, he has worked on more than 80 SPAC M&A assignments. Ellenoff’s firm represents nearly 70 public companies with respect to their ongoing 34 Act reporting responsibilities and general corporate matters. He also provides counsel with regard to their respective ongoing (SEC, AMEX and NASD) regulatory compliance.