A Boutique Investment Bank Bets on a SPAC

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There’s a puzzle in Perella Weinberg Partners’ ambition to go public by merging with a so-called SPAC.

Special purpose acquisition companies often partner with early-stage businesses that lack the track record of revenue generation required to do an initial public offering. A boutique investment bank that’s been around since 2006 is an unusal candidate for this sometimes controversial route to market. The terms of any deal will be instrumental to demonstrating Perella Weinberg has gone for a SPAC out of choice rather than necessity.

Cynics would argue that Perella Weinberg has more in common with recent SPAC targets than one might imagine. Boutiques’ revenue from advising on corporate activity comes in waves, so an IPO prospectus may not show the linear growth investors seek. Like an electric-vehicle company, Perella Weinberg’s pitch could be strongest based on projections for future growth. Recovery-driven M&A and pandemic-driven restructurings could potentially make next year unusually busy. The market seems to think this is likely: Shares of rival PJT Partners Inc., which has strong franchises in both areas, are up 38% since Feb. 21, just before investors woke up to Covid-19.

Still, it’s hard to believe Perella Weinberg couldn’t do an IPO if it wanted to. The choice to go to market with a blank-check company, revealed by Bloomberg News last week, suggests confidence it can achieve a better outcome this way.

A SPAC deal is a merger with a cash shell. The terms would be set by a private negotiation led by Perella Weinberg, rather than by IPO banks testing the market, a situation that would render the transaction a very public display of the firm’s deal-making acumen. The indicators of success will be the quality of the partner, the cost in terms of the equity surrendered to the SPAC sponsors, the standing of any new investors who provide additional equity to the deal via a PIPE (private investment in public equity) and the dilutive impact of any warrants granted to the SPAC side.

It’s not an easy simultaneous equation. Ideally, the partner would bring some kind of synergy. The bigger the PIPE, the smaller the proportion of capital that has to be raised from the SPAC itself, reducing overall costs. Given there are so many SPACs out there, Perella Weinberg should be able to get some tension going in what is effectively an auction of itself.

The tough bit comes in crafting a deal that ensures a decent share performance afterwards. Perella Weinberg will want to end up with a share register that facilitates good trading volumes in the stock. An immediate squeeze on the merger announcement would suggest it left money on the table. But pump up the valuation, and the shares might drift, making it harder for Perella Weinberg’s owners to sell their shares over time.

Similar issues dog IPOs, of course. But if one goes wrong, you can blame the investment banks and point to their potential conflicts selling a corporate client’s firm to trading clients who want a bargain. With a SPAC deal, Perella Weinberg would put itself in a goldfish bowl.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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