LPs question deal allocation around sponsor-backed SPACs

Activity around private equity-sponsored special-purpose acquisition vehicles has some limited partners concerned they might be missing out on quality deal flow that should go to a firm’s traditional funds, sources have told Buyouts in recent interviews.

SPACs are public vehicles raised to invest in specific deals, usually within a time limit of 18 months to two years. In some cases, a PE firm will back an industry veteran in raising a SPAC to chase a deal in a specific industry.

This year has seen a slew of such funds backed by big PE firms. Riverstone partnered with James Hackett to launch Silver Run Acquisition Corp II, which raised $1 billion in March. This is Riverstone’s second Silver Run SPAC; the firm partnered with energy veteran Mark Papa in 2015 on Silver Run Acquisition Corp, which raised $450 million in its IPO and bought a stake in Centennial Resource Development LLC.

TPG Capital earlier this year formed TPG Pace Energy Holdings with Stephen Chazen, former chief executive of Occidental Petroleum, to raise up to $600 million.

Other PE firms sponsoring SPACs include Kayne Anderson Capital Advisors to raise up to $402 million, and NGP, seeking $460 million, the Wall Street Journal reported.

As of April 18, nine SPACs have raised about $3.26 billion, according to Thomson Reuters. This is close to full-year 2015, when 18 SPACS raised a total of about $3.6 billion, Thomson Reuters said.

The peak year since 2010 was 2015, when 28 SPACS raised just over $5 billion.

LP concern

Some LPs are questioning how deal flow to GP-sponsored SPACs gets allocated, and whether they should get a look at those deals.

“LPs are sensitive to the potential conflicts posed by additional vehicles managed by their GPs, and the impact these vehicles may have on the deal flow available to the LPs’ funds,” said Peter Freire, CEO of the Institutional Limited Partners Association.

“Whether it be co-investments, co-sponsored deals, cross-fund investments or SPACs, we encourage LPs and GPs to address the disclosure issues around allocation of these vehicles up front in the relationship.”

Firms take different approaches to sponsored SPACs. Riverstone’s Fund VI invested alongside the first Silver Run SPAC in Centennial Resource Development, getting exposure to the company the SPAC acquired, according to a second person with knowledge of the process.

Silver Run Acquisition Corp II resides entirely within Fund VI, so the fund has access to sponsor economics, the person said.

TPG Pace Energy Holdings pursues deals that fall outside the mandate of existing TPG funds, or they are investments on which TPG has passed, said a source familiar with the process.

Some key points GPs should consider before using a SPAC to acquire a company: whether the target asset falls within the mandate of the traditional PE fund; whether the PE fund’s commitment period has expired; and whether the SPAC acquisition would put the GP in a position of conflict, according to Andrew Panayides, general counsel with Duke Street.

If a conflict is created, the GP would usually have to consult with and obtain consent from the fund’s limited partner advisory committee, Panayides said.

“In practice, you would expect GPs to fully adhere to the constitutional documents relating to their respective fund vehicles, particularly since there are commercial, legal and reputational consequences for GPs that fail to do so,” he said.

Action Item: Check out the S-1 for Silver Run Acquisition Corp II: http://bit.ly/2psHe5j

A technician opens a pressure gas valve inside the Oil and Natural Gas Corp group gathering station on the outskirts of Ahmedabad, India, on March 2, 2012. Photo courtesy Reuters/Amit Dave