With time running out to de-SPAC, demand for due diligence accelerates – BRG

In an anticipated rush to de-SPAC, thorough due diligence is critical to identifying risks and conflicts and protecting sponsors and investors.

This year is set to see high volumes of de-SPAC transactions, following the explosive SPAC craze of the preceding two years. But the pressure for aging SPACs to find assets and merge with them means elevated risks, so managers should take extra care in their due diligence processes.

According to Berkeley Research Group, while SPAC IPO and de-SPAC activity declined over the course of 2021, more than $138 billion was nonetheless raised for these vehicles – that money is now waiting to be deployed.

In 2021, 221 de-SPAC deals occurred, with a total deal value of nearly $404 billion, and 2022 is on track to beat that total.

The anticipated rush to de-SPAC existing transactions before their two-year terms expire means increased potential for hasty decision-making. Comprehensive due diligence on any acquisition target is therefore critically important for sponsors and underwriters to uncover potential legal, financial and reputational risks.

Kerry Ann Sullivan, a director in BRG’s Transaction Advisory practice with the Integrity Due Diligence group, says there is little time to conduct due diligence, making it imperative to uncover potential issues as quickly as possible. While due diligence for SPACs is 24 to 48 hours, there is generally more time for due diligence on a target company before a de-SPAC. But the surge of de-SPACs expected will contract that timeframe significantly for some sponsors.

Kerry Ann Sullivan, BRG

No matter what the timeframe is, Sullivan explains that due diligence involves thorough research on the target company and its executives and directors.

BRG focuses on potential conflicts of interest embedded in the SPAC merger and during the de-SPAC process, and the group will verify any information on executives included in the prospectus and other fund documents. BRG also will try to uncover any conflicts of interest among the team members, or any criminal, regulatory or civil issues.

“Generally, what we look at is the target company, its C-suite executives, and the new management of the company post-SPAC,” Sullivan explains. “You will have your typical background verification but we’re also going to be looking at the management history of the board of directors to see if they have specific experience in the target acquisition company.”

Due diligence also includes looking for headline risk associated with social media posts.

Right now, the technology and healthcare sectors are the busiest for de-SPAC activity, and for due diligence, Sullivan says.

And, while due diligence across sectors is the same, different sectors have different risks. For example, Sullivan said healthcare deals require very specific “deep dives”.

“You’re not just looking at the public records but making separate public records requests of archived non-public documents through the Department of Health and Human Services and other government entities. You must make public records requests, and those take time as it’s a very manual process and there is often follow-up,” Sullivan explains.