Special purpose acquisition companies (SPACs) have been around since the 1990s. Yet, 2020 saw more SPAC IPOs than in all previous years combined and was the first year where SPAC IPOs exceeded traditional IPOs. The first quarter of 2021 saw a continued expansion in the number of SPACs formed. In a statement on April 8, 2021, the U.S. Securities and Exchange Commission said: “over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies.”
SPAC founders include a wide range of investors, from corporate entities to sports stars. Increasingly, alternative asset managers have formed SPACs as an investment vehicle on its own or as a vehicle to provide an exit route for underlying portfolio company investments. In other cases, the fund manager only provides an underlying portfolio company of a fund as the acquisition target for a SPAC.
Since April 12, 2021, and in response to SEC guidance, much of the SPAC ecosystem has been focused on SPAC warrant liability accounting and valuation (see companion article in this publication). However, it is important to remember that alternative investment managers must continue to rigorously and reliably estimate and report the fair value of all their investments on a timely and periodic basis, including investments in various SPAC securities and in underlying portfolio companies that my be targeted by a SPAC for acquisition.
Alternative investment funds are required by FASB ASC Topic 946 to measure and report all investments at “fair value” as defined by FASB ASC Topic 820. FASB ASC Topic 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” We know that the fair value of actively traded securities (sufficient volume and frequency to determine a price) is the publicly traded price. The fair value of private (non-actively traded) investments is estimated using informed judgment and various valuation techniques to determine what a market participant would pay for the investment at the measurement date.
There are several types of investments that an alternative investment fund may make with respect to SPACs. These include, but are not limited to the following, with a summary of the valuation approach highlighted for each:
Such investments are valued based on the terms of the agreement, the probability of a successful business combination and applicable market participant assumptions.
Estimating fair value for illiquid or non-traded investments requires experienced, informed judgment. Investors in alternative investment funds need fund managers to provide reliable fair value estimates. Conceptually, investments in SPAC securities are no different than investments in traditional public or private debt and equity interests, yet the nuances of such investments must be carefully considered.
Our valuation experts provide valuation services for financial reporting, tax, investment and risk management purposes.
Heightened regulatory concerns and vigilance, together with increased investor scrutiny, have led to increased demand for independent expert advice.
We offer an array of valuation services to support a SPACs financial and tax reporting.
Kroll specializes in assisting clients with the valuation of alternative investments, specifically securities and positions for which there are no "active market" quotations.