SPACs Disagree

Tae Bo, the Macarena and Special Purpose Acquisition Companies (SPACs) each originated in the 1990s.  But thank God, only SPACs remain relevant today, generating a surge of interest and attention among owners of closely-held wealth management businesses seeking growth capital for acquisitions. 

Whatever the skeptics might say, SPACs offer privately-owned wealth management firms the ability to access public capital markets more efficiently than traditional IPOs, while offering owners more flexibility than they would likely get in a standard private equity deal.

Indeed, it’s quite possible that SPACs could become at least as popular as traditional private equity investment for owners of wealth management businesses exploring capital structures options.

“GROW OR DIE”

Closely-held wealth management firms increasingly face a stark choice:  Grow or die.  

Increased scale via acquisitions is crucial to successfully operating in a fee-compressed environment that requires constant reinvestment in new technologies, as well as an aging, more financially savvy client base and the changing business economics of client service.

Until now, the best ways to access significant capital for future M&A deals have been private equity or the public markets – Each with their share of shortcomings.

Traditional IPOs have the potential to turn on the cash spigot, but the process can be dauntingly complex, slow and expensive – Not to mention subject to big picture disruptions outside of anybody’s control.  Imagine, for instance, having the bad luck to list during the same week as the recent GameStop-driven market volatility.

Standard private equity deals can provide more immediate access to capital, but with potentially increased future ownership uncertainty and higher debt.

EASIER THAN AN IPO, BETTER THAN GETTING ‘PRIVATE EQUITIED’

In addition to a less cumbersome listing process compared to traditional IPOs, SPACs deliver the following advantages: 

  • Owners retain significant or controlling stake.  Most wealth management firm owners have developed close personal relationships with their advisors. By maintaining a controlling or significant stake, owners can secure growth capital while making sure they’re doing right by their advisors and keeping skin in the game for future upside opportunities. 
  • Better prices for owners’ equity. After a traditional IPO, share prices are subject to market fluctuations and other tough-to-control factors. In a sale to an already public SPAC, owners negotiate with a single counterparty, which creates more valuation control. 
  • Avoidance of expensive debt.  Using leverage to magnify returns is a hallmark of any successful private equity deal.  Debt isn’t necessarily a bad thing, but it is understandable why owners of wealth management firms would be cautious about higher debt obligations as a potential drag on future growth.  By contrast, SPACs, even if private equity firms run them, rely more on the proceeds of their IPOs to fund acquisitions, and less on debt that is expensive to service.
  • Sidestep fears of micromanagement and other agendas from outside forces.  Many private equity groups offer exceptional expertise as well as access to capital, but wealth management firm owners nevertheless will always be sensitive about the risks of being micromanaged by outsiders with their own value creation agenda.  And going IPO via the traditional route similarly opens up the risks of shareholder activism, change of control proxy contests and the like.

SPACS WILL KEEP GROWING

Could SPACs someday become nothing more than a final value creation tool for private equity owners of wealth management firms seeking a public market exit?  Yes.

But above and beyond such a purpose, SPACs have the potential to drive many other strategic goals for leaders of closely-held wealth management firms across the industry.

You’d be better off betting that the Macarena will become massively popular once more than betting against the rising popularity of SPACs for wealth management firms.

Adam Malamed is CEO of Ajax Investment Partners (www.ajax-partners.com), a Miami-based fintech incubator and strategic consultancy for the wealth management industry.  He previously served as Chief Operating Officer of NYSE-listed Ladenburg Thalmann.  In this role, he grew Ladenburg from $35 million to $1.5 billion in annual revenues, before helping to spearhead its sale to Advisor Group in February 2020.