Bill Ackman has it right

Let us begin with two important notes:

1) We really dislike SPACS. By design, the structure puts money in the hands of sponsors and third party advisors and generally leaves the merged company with an underfunded treasury and not much of a clue as to how to operate in the public arena. It is no surprise at all that most of those who chose what was pitched as an easier way to go public and completed their SPAC mergers are now swamp things, mired in single digit muck, left to flounder by an uninterested investment community.

2) We have no economic or other involvement with Pershing Square or anyone who works there.

With that out of the way, we do love helpful innovation.

On Friday 9/29 Pershing Square received SEC approval for a newly designed “son of SPAC” product called a SPARC. (https://www.sec.gov/Archives/edgar/data/1895582/000119312523247555/d305814d424b3.htm)

For a very small subset of very special companies with a particular goal for a public offering, we believe this structure is among the most company-friendly, investor rational process improvements to come around in a long time.  (“Among” because for many, the hybrid auction structure still has enormous advantages but that’s a different column.)

 

From an investor perspective, the SPAC approach of “give us your money now, to invest in something or other over the next two years, and oh yes, you can have it back, possibly with some warrants if it doesn’t work out” is as clever as going to the track and putting it all on a jockey with no steed, or betting on the favorite at the Kentucky Derby.  You might possibly get lucky and make a little money, but the risk/reward relationship makes little sense. Even if you do come out in the money, presumably those returns are certainly not what your fund investors, the ones paying your salaries, had in mind when they entrusted their capital to you. And in an environment where short term CDs pay ~5% and have close to zero associated risk, well, something about a bridge for sale comes to mind.

 

The SPARC structure is very different.  Investors receive a right to buy shares at the same price as the sponsor, in this case funds from historically successful Pershing Square, once they know what the target company is. Rather than of holding their collective noses and jumping in, investors can actually see that the pool not only has water but that the temperature and chlorine levels are to their liking. Don’t like it? Don’t invest; the look cost you nothing. Do like it?  Ok, see what the valuation looks like after a brief exploratory trading period and then make the call.  Really like it? Buy just as you would on the open market with any new issue.  Huge incremental knowledge shifts the balance of power to the investor.

 

From the perspective of the company to be acquired (CtbA) this structure also offers many pluses, albeit a few reasons to pause.  Starting with the pluses: The (CtbA) receives a real, meaningful, (not less than $250M, up to $3.5B) not instantly redeemable, deposit in the treasury account.  The size of the investment ensures that the investor (in this case Pershing) will have to care about the ongoing health of the company in the aftermarket as at that size, the position can’t easily be flipped. That's not Pershing's style anyway.  With no sponsor “promote” and the time value of the due diligence required before the investment, a quick flip = a lousy ROI.  Therefore, right from the start, the company has a key, committed, aligned, long-term investor not unlike what it would have with a strategic private placement.  But wait, there’s more: the investment isn’t a private placement as other shares in the company will trade in the open market allowing both employees and other investors the full range of daily trading opportunities. 

 

The other key element of the transaction is the price and on this, there are two perspectives. For some, avoiding the slings and arrows of daily market swings and bounces, and the comfort of locking in a price with a committed investor with other investor friends in high places, will likely be very, very appealing. Certainty can be really helpful as, for starters, knowing what will be in the treasury not only reduces stress but also can be super helpful to the budgeting process.  On the other hand, some managements and boards may believe that market enthusiasm will result in a higher valuation; it’s risk/reward thing.  Those believing the open market will pay more may choose to pass.  As mentioned earlier, this structure is for certain companies with certain goals.  Some may want certainty; some may want market pricing. The beauty is the company Pershing pursues will likely be savvy enough to have the option to decide either way.

 

There are numerous other details that make this structure worth a look for the few that qualify. We believe that SPARCs indeed solve almost all of the things we hate about SPACS, elements that honestly were problems for both issuers and public investors. Only the 3rd parties were winners in most cases.  That said, the one challenge that remains with the SPARC structure is readiness.  It is one thing to go public, via whatever structure.  It is quite another to operate successfully as a public company.  Too many looked at SPACs as a “get in the water fast” opportunity and then discovered that without having put in the effort to develop into strong swimmers, meaning thorough pre-listing preparation, it was a quick trip to the bottom of the pool.  Pre-IPO prep is incredibly important, regardless of the listing approach. Everything from smoothing out the quarter close process, to installing the right planning systems, to fully explaining to employees what it means to be a public company and much more, will matter once public, regardless of listing approach.

 

Still, as long-time critics of SPACs and in many cases Direct Listings, which benefit third party sellers more than issuers, a SPARC strike us as a genuinely thoughtful, fair, wicked-clever innovation that merits a close look by the subset of issuers for which it was designed. 

Hooray for Pareto Optimal innovation.

 

 

 

 

 

Words of Wisdom from Leslie's CFO panel at the 10th Annual IPO Summit

     On April 17, 2023, Class V Group co-hosted the 10th Annual IPO Summit at the NYSE attended by hundreds of private company founders, CEOs and CFOs. At that event Leslie moderated a discussion entitled  “CFO Leadership in Times of Uncertainty” featuring Tricia Tolivar, CFO of CAVA and John Rucker, CFO of Arcadia.  Below are a few insightful takeaways from that event.

1. Uncertainty is the new normal. It is important to have a clear mission.The mission should be the North Star of the organization in times of uncertainty and for the CFO, to be the steadying force. Develop a strong 3 to 5 year mission-driven plan and 12 month rolling tactical plans. Stay agile and communicate, communicate, communicate. Develop clear KPIs for workstream owners.

2. Do not expect a magical period of calm in which you will have time to focus on maturing the organization and developing public company readiness. You should be doing both simultaneously, operating the business and actively maturing the organization.  Almost everything you need to do to operate successfully in the public markets, you will want to do anyway to build a sustainable/thriving/enduring business, whether an IPO window opens up or not. 

3. It takes time to become IPO ready. Pick a date 18 to 24 months in the future and work back. Develop a multi functional work plan that includes each part of the organization that will have a role. In addition to finance and legal this includes HR, IT, Comms and more. Start with your data. A sound data strategy is critical to public company readiness. 

4. Expensive top down IPO readiness assessments may not be the best place to start for most young organizations. We prefer more tactical focused assessments with subject matter experts as partners who can not only help assess a technical area but can also provide tactical, affordable resources to help your team learn and remediate.

5. Build knowledge within your organization, Do as much of the tactical readiness work as you possibly can in house because that knowledge will be critical to your success once public. Bring in advisors to support your organization's learning so that your team is strong and ready. An advisor should act like a personal trainer, helping you develop the internal discipline and muscle to succeed as a public company.

6. Hire an experienced independent advisor to help you develop and execute your cross departmental IPO readiness plan and project. Some advisors are focused just on the transaction or investor relations. The best advisors provide senior level attention and get in the trenches with management and their teams building public company know-how..The right advisor can help you avoid costly mistakes on the path to readiness and should be 100% independent, working for the company and company only. Beware of advisors who get paid by your bankers, if they are paid like bankers they will operate like bankers.

7. A CFO should be ready to step up to lead the company through the IPO process to take your company public. If you are the right financial operations leader for your business you can be the CFO who takes the company public. Let your chosen advisor help you navigate what you do not know.

8. Be Prepared. Emerging growth companies are held to a public company standard as soon as the meetings with bankers and public investors begin. Work to develop relationships and a track record of delivering before you go public but make sure your story is crisp and clear.  Be confident that your organization is ready to deliver before you step out on the stage. 

9. Bring your board along for the journey. Visibility and delivering by successfully leading the public company readiness process underpins support. Your board can be tremendously helpful during the IPO process and you can learn from their experience, but at the end of the day, your team must call the shots. You will have to live with the outcomes. 

10. The Panel Projects that the IPO window opens later this year. At the Summit, our panelists painted an optimistic outlook for the IPO market citing signs the market is healing and potentially opening in the back half of this year. For example they saw block trades and marketed follow-on offerings coming back at increasingly narrow discounts indicating investor appetite for new issuance is recovering.

From the Ashes of Disaster Grow the Roses of Success

(Song  from the 1968 film Chitty Chitty Bang Bang, based on Ian Fleming’s novel by the same name)

No question, there are some ashes of disaster in the Silicon Valley Bank debacle. 8500+ people at various SVB entities are currently uncertain about their jobs and livelihoods, and sadly not at all uncertain about the value of their equity.  From every perspective the collapse of the Silicon Valley Bank, to put it mildly, is a very sad, very disruptive, just plain awful occurrence.

 

However, sticking with song titles, this is not the end of the world as we know it.  Many of those employees will recover under the bank’s eventual ownership structure, whatever that will be. Others will be snapped up by competitors trying to get a better handle on the magic that made SVB so important for so long. The companies that carefully saved money in deposit accounts at SVB, rather than say on an ego-trip Super Bowl ad, will find other places to stow that cash. In all likelihood, it is only the bank’s management that may well be cooked and, from everything we know so far, perhaps deservedly so.

 

But is this the end of Silicon Valley and ecosystem that spawns and grows innovative companies? Perhaps, the end of the county’s biggest engine of economic growth? That is surface-level thinking.  This is a big miserable bucket of cold water on the undeniably overheated economy that prevailed in start-up land until early last year.  When there is too much money in too many funds thrown with too much enthusiasm at too many companies, the timing is uncertain, the catalyst unknown, but the ending is a forgone conclusion and not a pretty one. 

 

However, the thing about being doused in a bucket of ice water is that after a good shake, it’s not that hard to warm up and dry off.  Just wait and see.  So shake off the panic, take a deep breath and look around. 

 

As many have stated for years and with clear evidence, this is not 2000, a time when, for many companies, behind the fancy website and astronomical valuation, there was no there there. Many of those internet darlings had optimistic slide decks and fancy-logoed t-shirts but not much (or anything) in the way of a sustainable business.  Contrast that with today when many still well-funded private entities have real products and services that real customers want.  These companies offer solutions to actual problems and therefore, compelling opportunities ahead.  For them, even before the SVB debacle, the sushi was already gone from the lunchrooms.  With the swoon in technology stocks, came an abrupt change in message from the boardroom from “Grow, grow, grow” to “Cut those expenses and aim for profitability ASAP”, a 180 that involves plenty of friction.  Painful ? Yes but do-able and in process.  Thanks to piles of cash raised in 2021, many have the runway to pull it off.

 

So we can check the first box. The ecosystem has spawned real products from real companies with enough resources to button up operations and soldier on.  Unfortunately, the challenge isn’t just about what can be controlled by the finance department.  Young company teams aren’t slaying a serpent, they are dealing with a Hydra. Specifically, while scrambling to adjust their operating M.O., these businesses also must contend with the incremental angst of ongoing macroeconomic uncertainty. In this environment, it is very difficult for long established companies to read the tea leaves and offer guidance with any accuracy. It is virtually impossible for younger businesses that have never been through one of these cycles to have a clue. Therefore, and quite correctly, many are being very, very cautious with their outlook for the next couple of quarters, hedging big-time on forecasts.  Of course, what follows cautious forward-looking commentary from public company CFOs is, inevitably, lower stock prices. And these "value adjusted" companies? They are also known as “comps”.

 

And that may prove to be the good news.

 

Macro uncertainty, a change in the focus of the operating model, dramatically reduced valuations may not appear to aggregate into compelling catalysts for the re-emergence of an active IPO market.  Appearances can be deceiving.

 

Until the SVB uh – event – many, not all but many, management teams and boards at private companies already at scale were content to rest on their balance sheets and proclaim the IPO simply won’t happen while valuations are wallowing beneath the sub-flooring. Stout treasury accounts and a renewed focus on cautious spending suggested that approach would work. Plenty of conversations this past 6 months that went like this: “Tighten up the P&L, heads down and when valuations come back, we will hit the public markets full speed ahead and bound for glory.

 

But that was then.

 

Everything changed last week when that virtual bucket – no tank - of ice water landed on the collective head of the Silicon Valley ecosystem (which by the way, is not geographically restricted to the west coast but rather every state that has any sort of entrepreneurial economy). 

 

Suddenly, the meaning of the old saw “hope is not a strategy” is painfully and irrefutably clear. 

·  The easy money is gone - for most

·  The relatively inexpensive lines of credit for “just in case” just got a lot more expensive and harder to land.

·  The venture funds, so recently at-the-ready to fund every AI (or other) entrepreneur knocking at the door as they scrambled to find opportunities to disperse the oversized funds they raised, have concurrently opted to yank back the reins.  Don’t call us; we’ll call you.

·  The balance sheet that looked plenty strong enough suddenly looks less certain. The days of “What, Me Worry?” have been replaced by sleepless nights and badly gnawed fingernails.

 

The times, they are a changin’.

 

But. but, but…… these are still real business with real opportunities. While growth may be slower, operating models for many are growing stronger.  Talented employees are more likely to stay put and, given the substantial layoffs of Q1 2023, it’s just a bit easier to selectively add to the teams.   These companies still want growth capital, solid balance sheets and liquidity. Reiterating: companies are still looking for, and to some extent now driven, to find liquidity.

 

Welcome back to the IPO market.  Q1, is about over and there was almost no IPO action. Q2 will be a time of continued adjustment and model re-alignment. By the time Q3 is over, many companies will have operating expenses under control, solid systems in place to measure outcomes from marketing, sales, engineering and overhead, a practiced ability to close quarters efficiently, and the painful recognition that stalling in hopes of attaining something near 2021’s valuation may be akin to sitting about waiting for a dude named Godot.

 

Some companies won’t get there from here. Plenty will.  They will take this pretty-shocking SVB wake-up call to spiff up the engine, check the oil, study the course and get the right driver in the seat, ready to put that pedal down when the moment comes.  About that timing…Will there be comfort about the direction of the economy and interest rates by Q3? Maybe. As 2024 will be an election year, it’s not unreasonable to assume the crystal ball will be less cloudy by then. 

 

Will valuations have rebounded? Maybe some, but to previous levels?  Nope. That shouldn’t matter.  The thoughtful, well-prepared teams will likely recognize that going public isn’t just about the price on deal day. It’s about a fully liquid market, a message of on-going stability, an enhanced treasury account and the opportunity to earn, not hope, the way back to a more fulsome market cap. 

 

How? Complete a smaller-than-originally-dreamed-of IPO, hit your forecasts, prove that yours is really a company, not a just a product or worse, a feature.  Demonstrate to the throngs of institutional investors with too much cash on the sidelines today that the management team understands the responsibilities and frankly challenges of being public, and remind your employees that the stock goes up only if the business delivers. 

 

You can’t win if you don’t show up and if you don’t get on the track, a competitor will take the pole position.  Management teams, looking at you. Now is the time to put fuel in the tank and rev those engines. Class V can help. The IPO market is coming back sooner than you may expect.