The success or failure of special purpose acquisition companies (Spacs), of which there are so many now competing for targets, all comes down to sponsors’ networks.
The prominent individuals whose names give box-office appeal to listed blank-cheque takeover vehicles need networks to attract good operating partners to work for them without salary.
They need networks of investors to raise money for Spac IPOs and then for the private investment in public equity (Pipe) deals that accompany the de-Spac; and they need networks to find good targets to acquire.
Keep an eye, therefore, on Freedom Acquisition I, which raised $345 million through an IPO on the New York Stock Exchange (NYSE) that closed at the start of March.
I was taken aback by how extraordinarily efficient the Spac process is in the US
Funds managed by Pimco are backing Freedom Acquisition. That is a useful endorsement in the US market that is world leader in technology innovation and growth.
But this was an offering heavily backed by very wealthy families from around the world, rather than the usual suspects of hedge funds and institutional real-money asset managers.
A hint as to the demand for its stock is evident in the tightening of the normal conditions attaching to warrants.
Spacs typically offer one-third of a warrant with each share. While warrants can later trade separately, only whole warrants can be exercised into stock.
On the Freedom Acquisition deal, investors had to buy four shares to get one whole warrant.
“The IPO book was around 15 times covered,” says Adam Gishen, chief executive of Freedom Acquisition. “It’s a bit like tightening the premium on a convertible bond. Going to a quarter of a warrant on each share rather than one third pares back the eventual dilution.”
Gishen knows what he is talking about. As an investment banker at Nomura and Lehman, he worked in equity capital markets (ECM), before moving on to independent advisory firm Ondra and then to Credit Suisse.
“Even having been an ECM banker for 15 years, I was taken aback by how extraordinarily efficient the Spac process is in the US, how knowledgeable the participants, how professional the service they provide,” he says.
The tough call over listing venue was not between the US and Europe: it was between the NYSE and Nasdaq.
“Europe has come along in the last few months, although you still had the issue of London suspending Spac stocks through a combination when we started thinking about this,” Gishen tells Euromoney. “But the US market is so very deep.”
The rules around Spacs prevent official declarations that IPO participants such as Pimco will also be anchor investors in any Pipe deal, but it would be odd if they weren’t.
Deep pockets
Less obvious to anyone reading through the prospectus is the impact of those family offices.
“These are blue-chip names with very deep pockets who take a long-term view,” says Gishen. “They don’t want to sell companies: they want to keep on investing. And that makes them a very good source of capital for listed growth companies.
“At the heart of what we are doing is that we want to find a management team we can work with for many, many years.”
Any target that reverses into Freedom Acquisition will be stepping into these shareholders. Some are based in the Middle East, some in Asia, some in the US and Europe. François-Henri Pinault, chief executive of French luxury group Kering, is one that has been identified.
Tidjane is a statesman that could make all the difference for these health platforms
It is reasonable to assume that he came into the deal through contact with the chair of the audit committee at Kering, one Tidjane Thiam, who is also executive chairman of Freedom Acquisition.
When Gishen says ‘we’, he is talking about Thiam, who Gishen worked for at Credit Suisse, ostensibly as head of investor relations but unofficially as chief consigliere.
“These family offices are all Tidjane’s contacts,” Gishen says.
Anyone who met Thiam during his time at the top of Credit Suisse knows how much he enjoyed dealing personally with the bank’s wealthiest clients, often coming back from meetings with a few hundred million more of whichever currency for his subordinates to run.
Freedom Acquisition aims to invest in a target in financial services where all the growth is coming in the fintech sector.
Four verticals
Gishen quickly runs Euromoney through the four verticals it is focusing on. Two are in insurance.
“We are looking at classic insurance where new technology is disrupting all along the value chain from the user experience to software for claims management,” he says.
The model here is Lemonade, a digital provider of home, renters’, pet and life insurance founded in 2015 with $13 million of seed capital. It is now listed on the NYSE with a market cap of $6 billion.
“We also really like healthtech, particularly tele-health or virtual care, which the pandemic has promoted but which is still only at the beginning of a huge change and combines hand-in-glove with insurance and payments,” says Gishen.
Abhishek Bhatia is the third member of the management team along with Gishen and Thiam, for whom Bhatia worked at Prudential, setting up and running a greenfield operation in Poland.
When Thiam went to Credit Suisse, Bhatia moved to Singapore to set up and run FWD Group, a full-stack digital insurer spanning auto, life, and property and casualty, for Richard Li, head of Pacific Century Group.
Euromoney can’t help wondering if Li invested in the Freedom Acquisition IPO. Gishen isn’t saying.
Payments is the very hot space, but there’s still plenty of room to grow there
While Thiam has used his network from Credit Suisse to raise capital for this new venture, his experience as chief executive of Prudential informs its vision.
“Tidjane wants to build on a secular growth trend in the real economy, just as he did at Prudential, bringing insurance to an emerging middle-class in Asia,” Gishen says.
“We’ll look to buy and build. It’s only companies grounded in the real economy that you can truly scale. A Spac, which happens to bridge private and public capital raising, is simply the best capital markets construct to do that.”
There is no shortage of ambition here. As for most sponsors, there is little interest in combining with any business now worth less than $1 billion to $1.5 billion. And the company is not scared to go large in any initial combination.
Thiam also has a network of political contacts.
“Tidjane is a statesman that could make all the difference for these health platforms now being developed in the US and Europe, with a Rolodex that could drop them into some very interesting countries with high growth and large populations that really need these kinds of services,” says Gishen.
According to Gishen, this is Thiam’s message to management: “You have built something great, let’s take it global. Let’s go from $3 billion to $5 billion of value and look to $50 billion to $100 billion.”
The other two verticals Freedom Acquisition is looking at are in banking, including neobanking.
Here, SoFi has set the model for proceeding from great customer relationships built on excellence in a single product to being a universal provider with low cost of customer acquisition and attractive unit economics from digital delivery.
“We like that whole concept of building from deposits and loans an offering that covers everything from cards to wealth advisory and insurance,” says Gishen.
Time to consider
There is another example here of the network effect. In the months after leaving Credit Suisse at the start of 2020, when Gishen was bound by non-compete agreements, he and Thiam had time to consider their options.
One might have been a similar platform to Martin Sorrell’s S4 Capital through which Sorrell appears to be building a new WPP – the world’s largest advertising and PR group – through a series of acquisitions, coming back to the markets each time to raise new equity for each of these.
But the network pointed in a different direction.
“We had a conversation with Viswas Raghavan last summer,” Gishen recalls, “when he told us that Spacs would be moving onto a new stage beyond private equity sponsors simply dropping new vehicles, to a time when experienced operators that had managed complex, universal businesses would come to the fore.”
Raghavan’s employers benefited, of course. JPMorgan led the IPO for Freedom Acquisition.
The final vertical it is looking at is payments, possibly the most competitive and the most feverishly covered, given the $95 billion valuation put on Stripe in its latest funding round.
“Payments is the very hot space, but there’s still plenty of room to grow there, with all the technology around points of sale, buy-now, pay-later and e-commerce,” says Gishen. “And the great thing about payments businesses is that they are highly scaleable on a global basis.”
A number of Spacs have recently formed looking to buy European fintechs. These have been growing, but lists of unicorns throw up the same handful of names: N26, Revolut, Klarna, TransferWise, or, as it is now called, Wise.
Gishen says: “You’re not allowed to talk to targets before a Spac IPO, and we did worry about the lower rate of innovation in Europe in recent years. There are some interesting companies being built in Asia for young and tech-savvy populations, and we are also looking at Brazil and Mexico.
“But the level of innovation through disruptive technology in the US just runs so very deep and across so many industries. There are so many interesting private companies beneath the big names that everyone has heard of.”
Euromoney wonders if the family offices of the billionaires that Freedom Acquisition distributed its own IPO to could also be a source of introductions to potential targets.
Many of them have their own venture capital arms and are assiduous builders of businesses.
“Yes,” agrees Gishen, only just managing to hide his bafflement that it has taken us so long to get it. “That’s why we did it this way.”
