Morgan Stanley, Evercore Tweak Payouts to Spread the SPAC Wealth

Blank-check company sponsors have been raking in millions of dollars in special deal fees, aided by a few Wall Street banks that helped make the merger vehicles the hottest ride of the past year.

But the idea that they give outsized rewards to their founders has caught on in the market and two banks are trying to fix that image with a new way of doing them.

Two of the banks trailing that top tier -- Morgan Stanley and Evercore Inc. -- are making changes to how special acquisition companies, or SPACs, are done that they say will bridge the gap between the returns that insiders get compared to regular shareholders.

The banks are zeroing in on ways to improve the structure around so-called promote fees, the stock payouts that SPAC founders receive in exchange for finding deals.

They’re hoping the bespoke model could help them gain traction with SPAC clients in a space dominated by Citigroup Inc., Credit Suisse Group AG and Goldman Sachs Group Inc., which handle far more SPAC volume.

Those three banks have held the left-lead position in more than half of all initial public offerings by SPACs since the start of 2020, according to data compiled by Bloomberg. They have amassed a combined $2.35 billion in fees from SPAC listings, the data show.

Morgan Stanley’s 5.4% market share of SPAC IPOs has delivered it $292 million in fees, while Evercore garnered $16 million in fees with its ranking of No. 20, according to the data.

SAIL SPAC

Morgan Stanley, which pioneered direct listings as an alternative to traditional IPOs, has created a SPAC model that it calls a stakeholder aligned initial listing, or SAIL. In a SAIL transaction, sponsors get their additional promote shares only if the merged company’s stock appreciates over time.

“The basic SPAC promote structure is not necessarily well aligned,” said Bennett Schachter, Morgan Stanley’s global head of alternative capital solutions. The SAIL structure provides incentives for deals to make them more long-term oriented, he added.

Investors gain “as the stock price goes up, which is what everybody’s motivated to see, and not only is it motivated to happen for one year or two years, this is long term,” Schachter said.

Morgan Stanley, Evercore Tweak Payouts to Spread the SPAC Wealth

It’s been used on a few deals already. Commercial real estate brokerage CBRE Group Inc. used the SAIL model for its SPAC in December that raised more than $400 million.

On Monday, General Catalyst Partners, which helped develop SAIL, filed for its second SPAC using the structure, with plans to raise $500 million. The investment firm’s managing director, Hemant Taneja, has said that his SPAC’s sponsors won’t earn returns until other stockholders do.

Evercore Capitalizes

Evercore calls its own alternative SPAC model CAPS, or capital which aligns and partners with a sponsor, which also ties promote shares to the merged company’s success. Under the model, sponsors get 5% of their promote shares at the close of a deal. After that, the sponsors are paid 20% of the annual appreciation of the volume weighted average price.

Former U.S. House Speaker Paul Ryan adopted this structure with his SPAC, Executive Network Partnering Corp., as did Periphas Capital Partnering Corp., a SPAC founded by former Goldman Sachs executive Sanjeev Mehra.

Evercore Senior Managing Director Neil Shah said in an interview that the new structures can fix the misalignment between SPAC sponsors and how they’re compensated versus other investors.

“People have always asked, why don’t we have a structure with less upfront and then have the rest based on the share price performance?” he said.

To be sure, similar arrangements are being used by other banks. Goldman Sachs used a payout model for its own second blank-check firm that ties promote shares to the performance of the combined company’s stock over time.

NightDragon Advantage

There’s a long way to go before such payout models go mainstream, and if they do, they could be easily copied by rival banks. It’s also possible that some serial SPAC sponsors are looking for quick returns and won’t want to try an unproven model.

One SPAC that used a new structure this week was NightDragon Acquisition Corp., a SPAC by cybersecurity executives including former Fireye Inc. Chief Executive Officer Dave DeWalt. Instead of the promotes being performance-based, it divides 20% of them over several years to avoid its target company being diluted immediately.

“This creates a huge advantage versus everybody else because it is aligning those shareholders with the management team,” DeWalt said. “It’s hard for (other SPACS) to compete with this structure that we have.”

Morgan Stanley’s Schachter, which underwrote the deal, said it was modeled on what the management team used when they ran their companies. Instead of its other new model SAIL, Morgan Stanley calls it SCALE, or stakeholder-centered aligned listed equity.

©2021 Bloomberg L.P.

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