As Sportico’s Brendan Coffey recently noted, nearly 20 special purpose acquisition companies (SPACs) with ties to sports and entertainment have filed to go public since the beginning of August (that list does not include DMY Tech II, which will take Genius Sports public in Q1 ’21). Not all are focused on acquiring companies in the space. But with roughly half intent on buying businesses within the ecosystem, it’s reasonable to wonder if there are enough late-stage, privately held, sports- and entertainment-focused properties—that also would make for good public companies—to go around. Conversations with multiple SPAC insiders revealed conflicting opinions on the matter.
Our Take: Those who believe viable investment opportunities are plentiful cite the value of the global sports ecosystem. Quick back-of-the-napkin math indicates the value of every professional sports team and league across the globe is somewhere between $500 billion and $1 trillion (Sportico’s NFL valuations peg the collective worth of the league’s 32 franchises at $99 billion). If one were to add the balance of businesses that profit from their association with pro sports (like the television networks that broadcast games) to the equation, the figure likely rises to somewhere between $3 trillion to $4 trillion.
To put that in context, even if every SPAC intent on pursuing sports and entertainment companies raised $500 million (which would be a large number—the average-sized SPAC is probably closer to $300 million), combined they would have just $5 billion. While SPACs can do deals three to 20 times their size, even with $100 billion of buying power they would represent a trivial percentage of the ecosystem’s total value (meaning, it shouldn’t be hard for the SPACs to find attractive investment opportunities). Of course, that does not mean every acquisition will be a home run. It’s far more likely we’ll see a bell-curve, as there always is when investment decisions are made. Some purchases will be awful, most will be average and a couple will generate outsized returns.
There is another school of thought that says the market always has a dearth of really good companies and with so many SPACs chasing so few opportunities, some will inevitably be left holding the bag. That doesn’t mean they won’t find companies to invest in. But with SPAC principals under pressure to spend the capital raised within two years, those that miss out on the best companies are increasingly likely to do bad deals.
One factor on which the large number of SPACs is certain to have an impact is the price of company acquisitions, as competition will drive offers upwards. As a result, the most successful SPACs—at least on a ROI basis—may be the ones that can create their own investment opportunities (i.e. those not being shopped).
The vast number of blank-check companies could also make it difficult for individuals trying to take SPACs public in the future, as underwriters are expected to become more stringent in their requirements. Apparently, they feel there is a point at which there is not enough public demand to feed the furnace.
For what it’s worth, none of the insiders we spoke to expect the SPAC craze to still exist at this time next year. The consensus was that as some SPAC principals begin to lose their investments, we’ll see fewer people looking to create them.
It has become more difficult for private equity to find attractive investment opportunities of late, but that development is unrelated to the rise in SPAC popularity. As interest rates dropped, stock market valuations rose, creating a valuation arbitrage between Wall Street and Main Street and a reason for privately held companies to head to the capital markets.
There’s little reason for private equity to view the sports- and entertainment-focused SPACs as competition. In fact, the SPACS can serve as an exit vehicle for private equity funds (think: Instead of pursuing a traditional IPO where they might get 10-20% of their stock sold, they can enter into a SPAC and get 100% sold). It’s also not as if the capital hasn’t always been out there, anyway.
While the proliferation of SPACs is likely to drive up the cost of later-stage companies (think: companies worth $2 billion to $10 billion), that’s not really where most private equity is playing. The vast majority of P.E. funds are investing in middle-market to higher middle-market assets—companies not really ready to be publicly traded. For the most part, P.E. should remain unaffected.