SEC eyes stricter disclosure rules for SP ACs; will next year be a sellers’ bonanza?

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The Wire

Dec. 10, 2021

SEC eyes stricter disclosure rules for SPACs; will next year be a sellers’ bonanza?

Happy Friday!

There’s an expectation that next year will be a sellers’ bonanza, as investment firms stuffed full of capital will be looking through a limited inventory of deals. In other words, there won’t be enough deals in the market for all the money out there, leading to continued rich pricing and happy sellers.

“We’re really bullish about next year,” a tech investment banker told me recently. The software universe is especially well-poised for robust dealmaking next year. In the inflationary environment, with supply chain bottlenecks gradually easing, software companies will be able to raise prices without having to withstand the impacts of rising costs.

“Software companies don’t have the same kind of input costs, even with labor costs going up,” the banker said. Valuations in software deals have hovered around 10x to 20x recurring revenue, and those multiples do not look likely to fall next year, the banker said.

“Private equity firms complain about it,” the banker said, but with so much capital flowing into the industry that has to be invested, “we expect this to persist for a while.”

What are you seeing out there in terms of pricing and expectations for next year? Hit me up at cwitkowsky@buyoutsinsider.com.

SPACs: SEC chairman Gery Gensler indicated in a speech yesterday that reforms may be coming around disclosure rules for special purpose acquisition companies (SPACs).

SEC staff is exploring rules to make sure investors are better informed about SPAC targets, fees, projections, etc, and to make sure they have quality information while they’re deciding whether to invest.

There are certain information asymmetries the SEC may be able to correct. Private investors into public SPACs generally get access to better information than retail investors. Mom and pop investors may not have the info they need to understand how their shares could get diluted through the stages of the SPAC, including by the sponsor pocketing its slice of equity once the deal is approved (usually 20 percent).

“The dilution largely falls on the “remainers,” not those who cash out after the vote,” Gensler said, according to a transcript of his speech.

Also, SPAC sponsors are able to hype deals before full disclosure about the target company is required, moving the stock price on potentially incomplete information. “SPAC sponsors may be priming the market without providing robust disclosures to the public to back up their claims. Investors may be making decisions based on incomplete information or just plain old hype,” Gensler said. “It is essential that investors receive the information they need, when they need it, without misleading hype.”

While an important correction to help protect the great masses, such rules would certainly make for a less entertaining market.

That’s it for today. Have a great weekend! Hit me up with your thoughts, tips n’ gossip or book recs at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.

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Also of note (may require subscriptions)

The FT's Sujeet Indap has an op-ed today about Sen. Elizabeth Warren's proposed "Stop Wall Street Looting Act of 2021," saying it's about "fundamental accountability" that "takes aim at private equity and upends core tenets of the Chapter 11 bankruptcy system." (Financial Times)

"Two National Hockey League teams are nearing agreements to sell minority stakes to a private equity firm, making the NHL the latest professional sports association to embrace institutional investment as franchise valuations soar." (Financial Times)