SPACs have become the new way for companies to go public. But do they work for the wealth management industry?
In some cases, they might. Yet, it’s hard to imagine they’ll ever replace private equity as the leading purchaser of RIA firms. Here are a few reasons why:
- The clients are too important. As with many owners of service businesses, RIA founders invariably have a deep desire to ensure that the level of client service stays the same or perhaps even gets better once they sell their firms. This increases the chances that most will continue to seek deals with other RIA owners or private equity firms who have a strong track record of success.
While some SPACs may be able to entice sellers with the promise of infrastructure improvements, that still won’t ensure a great client experience. In fact, it could do the opposite, as these “improvements” could result in technology replacing human interaction.
- There’s a difference between making a deal and making the right deal. RIA transactions take about a year to complete. That creates a narrow acquisition window for SPACs, which must spend at least 80% of their capital within 18-24 months, per SEC rules. Is that enough time to get a deal done? If everything goes well, yes. But it may not be enough time to produce a deal that works well for everyone.
The issue is – curveballs happen. While no one likes to walk away from a negotiation after expending months of effort, sometimes that’s the best option. But SPACs often can’t afford to stop and start again with another seller. These time pressures can yield a poor result for clients and employees.
- Mania, investor delusion and potentially increased regulation. The SEC recently issued an alert warning the public not to get involved in a SPAC “just because someone famous sponsors or invests in it…” This is notable because it demonstrates, along with Chairman Gary Gensler’s recent comments, that the SEC is likely to take a hard look at SPACs in the future.
When it does, it will likely take a dim view of how the average investor gets treated. SPAC sponsors, directors and executives get paid no matter what if they can close a transaction. But because some investors will exercise their right to redeem their shares before a deal is completed, the other, less watchful investors – who may not be as aware of voting deadlines – will see the value of their shares diluted.
To make matters worse, even those early redeemers will pay a price because they’ve endured the opportunity cost of having their money tied up for up to two years. If the SEC changes regulations as result of these issues, SPACs may no longer be such an easy way to go public.
- Public vs. Private.The benefits associated with staying private are significant. Not only can there be tax advantages, but private companies don’t have to reveal their strategic plans and financials.
Public companies normally feel outsized pressured to beat Wall Street expectations each quarter. While growth is good, often demonstrating the health of a company, growing too quickly can be detrimental, no matter how many superstars are on the team – and that can make for a difficult environment for sellers, employees and clients alike.
These are a few reasons SPACs won’t be the dominant player in wealth management acquisitions in the near term. Going forward, however, as private equity firms seek an exit for their portfolio companies, they’re likely to sell to a SPAC instead of the traditional IPO path – which could change the dynamic around this debate.
Carolyn Armitage is a managing director with ECHELON Partners (www.echelon-partners.com), a leading Los Angeles-based investment bank focused on the wealth management industry. In the past three years alone, the firm has advised on 35 transactions that collectively encompass more than $63 billion in assets under management.