Kensington Capital IV (NYSE: KCAC.U) filed for a $200 million new SPAC tonight, and while this is their fourth SPAC, they’ve gone slightly out of order. Kensington I & II have completed their transactions with Quantumscape and Wallbox, respectively, but they also currently have Kensington V out searching. So they skipped Kensington III, but are now back to IV. However, by filing for a new SPAC this afternoon, it could mean the team is close to announcing something soon with Kensington V. But that’s just a guess.
Nonetheless, the Kensington team has been remarkably consistent in their focus of finding companies in the automotive space and Kensington IV intends to have the same focus with their new SPAC. If it ain’t broke…
However, what is new with this transaction is their unit and warrant structure which will include an “incentive warrant” this time, and a big, juicy full-warrant at that. The details are that KCAC.U will IPO with a unit comprising of a share, a Class 1 warrant and a Class 2 warrant. However, when that IPO unit eventually splits, it’s not going to split and trade as three separate securities (a share, Class 1 warrant and Class 2 warrant). Instead, only the Class 1 warrant will peal off and the remaining share and Class 2 warrant will begin to trade as a new unit with the symbol KCAC.NU.
The Class 2 warrant is essentially an incentive warrant. You only get to keep it if you don’t redeem the share at a shareholder vote since they are attached. Getting some form of additional warrant is always attractive, but the Kensington team went a step further by making it a full warrant. It would be hard to forego a full warrant just to receive the redemption value of the share. Which, by the way, is not over-funded. This is a 100% in trust deal so day-one the trust value will only be $10.00. All told, the incentive warrant was put in place in an effort to protect the trust from excessive redemptions, which have been steep lately.
To review: KCAC.U will be 100% in trust, 24 months, with a unit comprising a share + a Class 1 warrant and a Class 2 warrant, both of which are full warrants that you can can exercise at $11.50 for full shares. However, the Kensington IV team is also asking for an eyebrow-raising 30% promote rather than the typical 20% promote. The extra promote also means they had to make their IPO structure even more attractive to investors. However, the sponsors have also expressed an interest in purchasing up to $32.675 million of the offering, i.e., they intend to bite off a big chunk of the offering so the bankers only really need to sell roughly $167 million.
The Kensington team has had a fair amount of success to-date with their first two deals, both of which are currently trading at $17.30 (QS) and $12.84 (WBX). Typically, a team with that kind of a track record would file for something more like a 1/3 of a warrant and 24 months. However, these are challenging times and the market is such that even top tier teams are IPO’ing with over-funded trusts, time horizons of 18 months, and 1/2 warrants. And even with those terms very, very few are trading above $10.00. And the current over-arching macro-economic theme of inflation has soured the public markets (in general, not just SPACs) for anything tech or growth oriented. Companies would much rather tap the private markets which are offering significantly loftier valuations right now. Basically, trying to IPO in the public markets in Q1-2022 has become an exercise in self-flagellation. The bottom line is, terms better be extremely compelling.
Something to consider as well…SPACS that IPO is Q1 could maybe (hopefully) announce a deal in Q3 or maybe Q4, with a closing roughly 4 months later. That would be putting timing at about a year from now. Depending on where you think the market will be once we sort out rate hikes, quantitative easing and inflation, could SPACs with incredibly juicy terms that are IPO’ing right now be setting themselves up for huge wins in 2023? Keep in mind that SPACs are cyclical and it won’t be gloomy forever. Timing, as they say, is everything.