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Jarred Kessler is the CEO of EasyKnock.
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If you own a company or work in the banking sector, you may be hearing the term “SPAC” 10 times a day now. It seems to be an increasingly common belief that SPACs are becoming the new go-to alternative to private equity fundraising. I traded SPACs in the late ’90s until 2010, and then when I ran a global equity business, we worked with them before the banks came into the craze. And today, I am one of many founders who is keeping a thumb on the pulse of how the SPAC space affects business outcomes.
In summary, a special purpose acquisition company (SPAC) is “formed to raise money through an initial public offering to buy another company. At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition. Investors in SPACs can range from well-known private equity funds to the general public. SPACs have two years to complete an acquisition or they must return their funds to investors.”
Owners of real estate technology — proptech — companies and other startups should be paying attention to this space because, in my view, there is too much money and too few platforms in this industry. Like any other asset classes that become hot, at some point there just aren’t enough opportunities for owners. In real estate technology, there is too much demand and not enough supply.
With more SPACs coming to market, this dynamic will lend itself to more opportunities for proptech companies to go public earlier or get acquired. Companies that were in discussions about opportunities with private equity firms should now pause to take a look at SPACs. These business leaders need to analyze their focus as well as who in the startup sphere might be interested.
I believe the strategy, class or whatever you want to call it has now found a structural change. It’s not a bull market product, and many people will use SPACs as an alternative to private equity — they are here to stay. That being said, I do predict that we will see fewer IPOs later this year due to this dynamic.
In the next evolution, I suspect we will see the following:
A lot of proptech startups will go public earlier than they would have before, and this will impact the venture capital world. It’s just math: too much money and not enough product to buy. This will leave less for later-stage venture investors. The news of Opendoor possibly going the SPAC avenue is a great example of later-stage customers losing their opportunity to invest more. Nevertheless, the current investors can now have a liquidity event by going public early.
Multiple mergers will coordinate at the same time to make a more meaningful result. For instance, if one party has a data platform, another has an origination platform and a third has a synergistic lead funnel company, perhaps these companies combine and the SPAC sponsor sells these deals together. In this scenario, 1 + 1 + 1 will not equal 3, but maybe 10. There is too much money going into the SPAC market for this not to happen.
Lastly, funds that traditionally raised money through limited partnerships for private equity funds now have a pocket for SPACs. The real estate market is capital-intensive, and there can be a win-win for SPAC sponsors and companies. Every asset class evolves, and I think we can see some real opportunities to marry the capital going into the SPAC world with real estate — specifically in the proptech space, because the U.S. real estate market is bigger than anything out there, asset class-wise. If the volume of SPACs continues to increase as expected, you will see them target smaller and smaller companies and give up economics to make it work. This is great for shareholders because of how it creates options for liquidity.
The bottom line for heads of real estate tech companies is that you are doing yourself a disservice if you are not paying attention. After all, as the expression goes, “follow the money.”
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?