On December 22, 2020, Bill Haddad was quoted in Venture Capital Journal on the potential conflicts and benefits of special purpose acquisition companies (SPACs). A SPAC is an investment vehicle that takes a shell company public by raising capital from public and private institutional investors. It then has about 24 months to buy a private company, usually in a predetermined industry.
According to the article, it can be a major conflict of interest for a private equity (PE) fund to also raise a SPAC, particularly when there is overlap with the fund in strategy and size. Because SPAC economies are attractive regardless of deal outcomes, funds and individual general partners (GPs) could be drawn to raising SPACS instead of spending time on their fund management duties and supporting their portfolios. The fact that many venture capitalists (VCs) with SPACs are investing in early-stage start-ups for their venture funds while looking for a larger target for their SPACs avoid the large potential issue faced by PE and growth equity firms.
However, VCs could run into a similar issue if they regularly invest in late-stage deals. “If you are deploying under $10 million per deal, you are less likely to see dealflow suitable for SPACs. But if a VC is writing $15 million to $40 million checks, they are exposed to ‘SPAC-sized’ companies,” says Haddad.
One of the ways to avoid making it seem that the SPAC is competing for deals with the fund is to share SPAC economies with limited partners (LPs) by putting the SPAC inside the active fund and treating it like any other investment in the portfolio, Haddad says.