SPAC

Subscribe to SPAC via RSS

Everything, everywhere, all at once is our risk thesis for 2023, but one must not forget about concentration risk.  This issue has rocketed up diligence agendas for LPs and GPs alike as the collapse of Silicon Valley Bank proved it really was the bank for venture capital.The entry of SVB into receivership on March 10, 2023 highlighted just how central it had become to U.S. venture capital, providing deposit and credit facilities not just to asset managers, but also to many (and in some cases the vast majority) of their portfolio companies and investors.  While deposit accounts were protected in full, companies unable to access those accounts for several days faced significant disruption.  Further, while borrowers were still bound by terms of credit agreements, there was no immediate obligation on the Federal Deposit Insurance Corporation (FDIC) as receiver to honor drawdown requests (although the bridge bank did announce it would honor credit facilities). Net asset value (NAV) lines, subscription lines and investors’ own deposit and credit lines were also affected. The deposits and loans of SVB were acquired from FDIC by First Citizens Bank on March 27, 2023.

Everything, everywhere, all at once, as a descriptor, captures the litigation and regulatory risks for the asset management industry in 2023. Every corner of the market faces greater risks than at any time since 2008. After years of breakneck growth fueled by low interest rates and a largely laissez faire regulatory regime, significant change is here.

We previously noted that SEC Chair Gary Gensler suggested the SEC would adopt new rules governing SPACs because, in his view, SPACs are very similar to initial public offerings but lack protections available to traditional IPO investors.  And now, the SEC has taken concrete steps to treat “like cases alike”…

We reported last year that unprecedented SPAC deal volume signaled an increased risk for disputes given their unique structure, including risks associated with disclosure requirements, material non-public information, valuation, and conflicts of interest. Our assessment proved prescient, as the SEC began to flex its enforcement muscles vis-à-vis SPACs as the year progressed, and took specific notice of potential asymmetries between SPACs and traditional IPOs that may form the basis for disputes in 2022.

Last year, we wrote, “The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008.” That statement is even more true today. The Wall Street Journal recently published separate front-page stories on an SEC initiative to oversee large private companies and the explosive growth of the private credit industry (suggesting a more active phase of regulatory oversight). Growth itself is not necessarily a risk, but disputes – and regulators – tend to follow capital.

Private funds are now an integral part of the global economy and, as a consequence, are affected by it. Currently, there are massive structural changes occurring simultaneously across industries and the economy as a whole. For example: cryptocurrencies could threaten legacy payment systems and currencies; the electrification of the auto industry may lead to obsolescence of the internal combustion engine; and climate change will increase the ESG groundswell. These changes are not merely disruptive; they are transformative.

The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008. Just a few examples prove the point: the pandemic (which caused extraordinary volatility in revenues and valuations for most asset categories); a new administration in Washington D.C. (with a more…