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A Brief Update on SPAC Valuation

A Brief Update on SPAC Valuation

JUSTIN BURCHETT

Well, thank you everyone for tuning in. In this session we're going to talk about the valuation of SPAC instruments. These are the complex financial instruments that are used to finance special purpose acquisition companies. I am Justin Burchett. I'm a managing director in Stout's Valuation Practice in New York.

TIFFANY CHI

I'm Tiffany Chi, a senior vice president in Stout's Valuation Practice in Los Angeles.

JUSTIN BURCHETT

So let's start with some background: Why are clients requesting valuation of these SPAC instruments now? Haven't these been around for some time?

TIFFANY CHI

Yes, SPACs have been around for awhile now but it wasn't until recently that the SPAC market exploded. In the first quarter of 2021, over 300 SPAC IPOs were completed. Then in April of 2021, the SEC issued their controls over financial reporting requirements and internal controls in SPACs. They also issued that certain financial instruments have to be valued because they are liability classified and therefore many SPACs needed to be valued to restate their financial statements.

JUSTIN BURCHETT

And who are some of the clients you're providing valuations for currently?

TIFFANY CHI

Currently, most of our clients are the SPACs themselves but we have also done these valuations for SPAC investors and sponsors as well.

JUSTIN BURCHETT

OK, let's go over what what type of financial instruments are found in SPACs? And are these, you know, similar in structure to do other financial instruments that you value as part of your normal coursework?

TIFFANY CHI

Most of the SPACs have similar instruments and some of these instruments include public and private warrants, founder shares, or purchase agreements and PIPEs. The public and private warrants are option-like securities and they usually have a strike price of $11.50. The public warrants will usually have a redemption feature in which the company may redeem the warrants back if the share price is about $18. Sometimes you will also see a make whole table in which this back can redeem the wards back as well when the share price is between 10 and $18. The private warrants will generally not have any of these redemption features. For the founder shares, these are usually sponsored shares that will vest once the trading prices above certain threshold. Then the PIPE in the forward purchase agreements are like similar to other forward type instruments.

JUSTIN BURCHETT

Thank you. And what type of valuation approaches or valuation techniques do you use to perform valuations of these SPAC instruments?

TIFFANY CHI

For the private warrants, since these are generally similar to other simple option-like securities, a Black-Scholes option pricing model will suffice. For the public warrants that have redemption features or the make whole table, a Monte Carlo simulation or binomial tree would be required.

JUSTIN BURCHETT

Thank you. Can you help us to understand what are some of the challenges that that a practitioner may face when valuing these instruments?

TIFFANY CHI

One of the most important inputs into the valuation models is the volatility and that is not easily observable. We use a few different ways to come up with the volatility. We look at the implied volatility of various SPACs that have warrants trading. We look at the pure company if the SPAC has announced a merger, and we also can look at the implied volatility of publicly-traded warrants.