Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It's no secret: Stock market volatility has crushed the hopes of most companies planning U.S. initial public offerings in early 2016.

The list of those that have put IPO plans on ice includes OTG (an operator of restaurants and concessions at North American airports), Elevate Credit (an online lender), Advanced Disposal Services (a waste collection company) and Nutanix (a maker of software and hardware for data centers). 

Why then, was it so easy for Silver Run Acquisition Corp. to raise $450 million in the year's biggest IPO on Tuesday, one of only a handful priced this year? 

IPO Drought
Just six U.S. IPOs have priced so far in 2016, the fewest since the first quarter of 2009.
Source: Bloomberg
*Includes U.S. IPOs aggregated by pricing date.

Silver Run is an an energy-focused "blank-check" company (without an established business, but with funds to make investments), with a stated strategy of snapping up inexpensive assets. One reason for its appeal may be its leadership: Silver Run's CEO is Mark Papa, the former head of Enron spinoff EOG Resources. The company's backing by private equity firm Riverstone Holdings probably helps, too.

And while Silver Run will be competing against other private equity firms and their affiliated entities  for deals, that doesn't appear to have been a deterrent. In fact, Silver Run was able to raise $50 million more than its initial target, and the stock rose 2.4 percent in its trading debut Wednesday as of 2 p.m. New York time.

But the main reason Silver Run wasn't hamstrung by market conditions is because it raised funds as a special purpose acquisition corporation, or a SPAC. Unlike most pending IPO candidates, SPACs are immune to whipsawing equity markets as they don't yet have earnings or revenue, meaning their valuations can't be compared to industry peers. Also, they aren't tied to selling shareholders who seek valuations above certain levels in order to hit return targets or simply don't want to leave money on the table by taking a company public below what they see as fair value. 

SPACs come with their own risks: they might be unable to find acquisition targets and may pay executives bonuses for dealmaking, creating misaligned incentives that have the potential of resulting in suboptimal deals. Unwelcome or dilutive acquisitions, as well as a heavy reliance on debt financing, can also pummel stocks. Platform Specialty Holdings and Nomad Foods, which both count Pershing Square Capital among their biggest investors, have both shed roughly 65 percent in the past six months. 

Silver Run seems to have mitigated risks as much as possible: It has given itself 24 months to make a purchase, and if it doesn't, intends to repay investors. Plus, its IPO filing shows that "no finder's fees, reimbursements or cash payments will be made to our sponsor, officers or directors, or our or their affiliates, for services rendered to us prior to or in connection with the completion of our initial business combination." 

If markets don't stabilize, SPACs could make up the bulk of U.S. IPOs we see in coming months. Since October 2015, at least nine such companies have announced plans to become publicly-traded, aiming to raise nearly $1.4 billion between them.

On the Runway
At least nine special purpose acquisition corporations, or SPACs, have filed to go public since Oct 2015.
Source: Bloomberg

As with any new deal, investors should make sure they read the fine print.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net