Sat. May 28th, 2022

Spac bankers are agreeing to slash their fees on deals if they face large redemptions in a sign of the desperation to complete blank check transactions in a difficult market.

Investors have been redeeming their money from Spac deals at increasing rates amid heightened regulatory scrutiny, a string of scandals and poorly performing Spac mergers. Average redemptions hit 90 percent in February, according to Dealogic data.

Spac executives raise money from investors and publicly list the shell company, later searching for a private company to merge with and take public. The Spac market has significantly cooled in recent months as investors grow wary of funding companies with little revenue or inexperienced management teams.

Spac bankers, who have enjoyed a fee bonanza from arranging deals, are now cutting their fees depending on the level of investor redemptions. This shows how the huge withdrawals have forced a shift in incentives from simply completing deals to minimizing the amount of money being pulled.

Column chart of Average investor redemptions for Spac merger deals (%) showing Spac investor redemptions soar

Banks typically receive a 2 per cent upfront fee and 3.5 per cent deferred fee once the merger is complete.

Critics of the Spac structure have long decried how bankers earn fees based on the proceeds raised from a Spac’s initial public offering regardless of the final sum left after investor withdrawals.

“Underwriting fees should get scaled proportionate to redemptions,” said Michael Ohlrogge, a professor at New York University law school who studies Spacs. He added that Spac teams whose deals face huge redemptions but do not cut fees can find themselves shelling out vast sums as a percentage of the deal value.

Earlier this month, Credit Suisse agreed to reduce its fees from $ 14.5mn to $ 10mn on the merger between a Spac sponsored by New York-based venture capital firm FirstMark and broadband company Starry.

Others cutting their banks’ fees include blank check company Global Spac Partners, which agreed to merge with Gorilla Technology, a Taiwanese video software company.

I-Bankers Securities, Dawson James, Ingalls & Snyder and Ladenburg Thalmann are set to earn a combined $ 5.86mn in fees, worth 3.5 per cent of the IPO proceeds, once the merger is complete. They agreed to a pro rata fee reduction depending on redemptions, up to a maximum 20 per cent cut. If the deal faces “maximum redemptions”, the banks will still make $ 4.7mn, according to regulatory filings.

New York-based Maxim Group is set to receive $ 1.84mn in fees, 4 per cent of the total IPO proceeds, once the merger closes between Agba Acquisition and TAG Holdings, a group that includes automotive and heavy equipment companies. The bank has agreed to cut its fees by 20 cents for each unit redeemed by shareholders.

Credit Suisse declined to comment. The other banks did not respond to requests for comment.

Spac deals usually must meet a minimum cash level. Investors who funded the blank check vehicle when it listed but dislike the target company can pull their money.

“Specialist investment banks have been more flexible in terms of their willingness to cut back their fees particularly if it means they can still claim they’ve been involved in a successful deal,” said Adam Brenneman, a partner at Cleary Gottlieb.

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