Why Gaw Capital is targeting institutional capital for its SPAC

The rise of special purpose acquisition companies during the past year and a half has largely been driven by retail investors. But for Gaw Capital Partners, the structure is another conduit for institutional capital.

During a Deep Dive panel for PERE’s Global Passport last week, Gaw Capital chairman and founder Goodwin Gaw said his firm plans to lean heavily on its Rolodex of US institutions for its SPAC, Gateway Strategic Acquisition Company, which launched in the spring with a target of $300 million.

He said bringing institutional capital to a SPAC acquisition will give confidence to whatever company GSAC ends up targeting. This point of differentiation is especially important as the SPAC universe grows fuller.

“The key in the more and more crowded market will be the sponsors who have access to the more longer-term investors,” Gaw said during the event. “If you go to a SPAC with a sponsor that can bring these long-term investors in day one… you get more transparent pricing that is less susceptible to market volatility. Some hot IPOs could double or triple on day one, which means you’re leaving too much money on the table because of an opaque pricing strategy from investment banks or sponsor security houses.”

Also known as blank-check companies, SPACs are shell companies that raise capital through listed exchanges with the express purpose of combining with an existing operating company. In the last 18 months, more than $190 billion has been raised in more than 590 initial public offerings, according to the website SPAC Research. GSAC is one of 292 vehicles that have yet to IPO; those groups are targeting a combined $69 billion.

Gateway to APAC

Once Gaw’s SPAC is capitalized, the Hong Kong-based firm will focus its efforts on identifying a target. Gaw said the plan is to find a promising startup in China or elsewhere in the region and then use the SPAC acquisition to take it public on the New York Stock Exchange. This could be part of a dual-listing strategy for the target company or a direct-to-US approach.

“China is a large market, and many US-based institutional investors are looking for opportunities to get into this world in China and it’s not so easy to access for them,” Gaw said. “So, this could provide a venue.”

While institutions remain the focus, Gaw also sees this approach appealing to retail investors who have traditionally been cut off from cross-border investments. This is particularly true in China, he noted, which has only been accessible to the most sophisticated investors. “If you’re not an institutional investor with Sequoia, Hill House or some of the bigger boys in China, you [haven’t been] able to access these opportunities,” he said. “So that’s a plus.”

The SPAC will focus on companies that already have venture capital investments from US firms, he added, to avoid having to restructure them to comply with regulators in both countries.

Asset-light approach

Instead, it is more likely to look for so-called “asset-light” companies, such as software providers or e-commerce firms that rely on physical assets for growth, but not as part of their core business models. “I could see a business combination where some of those assets could very well be a part of that combination along with an asset-light, higher growth, more interesting story that would appeal to the public market,” he said. “I don’t see it as an asset-heavy company or property-heavy company.”Gaw Capital will use its property expertise to grow whatever company is acquired by GSAC, Gaw said, though it is unlikely it would acquire a pure-play real estate group, which do not lend themselves to the type of growth sought by SPAC investors.

Fellow panelist Paul Kang, president and chief investment officer of Alta Companies, a long-time SPAC investor, said he traditionally would not have been interested in a hard-asset acquisition strategy, but pandemic-driven distress has changed things.

“A year or two ago we would have said that’s really too boring for a SPAC,” Kang said. “But these days, with the pandemic, there’s a lot of dynamism in the space. There’s… a lot of undervalued assets in hotels, malls and office space.”

Proptech in focus

In March, around the same time it launched GSAC, Gaw held a first close for its debut property technology fund, securing $200 million of its $400 million target. While the vehicle, Gaw Growth Equity Fund, will target growth-stage firms, the SPAC sector has emerged as a viable exit platform for real estate-focused tech startups.

Proptech has emerged as a prime target sector for SPACs, panelist Zach Aarons, co-founder and general partner of the venture capital firm MetaProp said, even for sponsors who did not set out to target the space.

“It is really exciting for someone like me to see generalist companies who have their pick of the litter, they can buy [electric vehicle] companies, they can buy life sciences companies, they can buy sector agnostic software-as-a-service companies, they are now choosing to combine with proptech companies, and we think that activity will continue into the back half of this year,” Aarons said.

US SPAC activity cooled down this spring. After rising through the first three months of the year, the number of new vehicles dropped from 109 in March to 13 in April, according to a report from Nasdaq. With more than $130 billion waiting for deals, per SPAC Research, the sector has a lot of capital to deploy in a relatively short period – most SPACs are allowed two years to find an acquisition target or else they must return the capital to investors.

With much of that capital focused on acquiring US-based companies, Kang sees Gaw Capital’s offering, with the firm’s access to China and knowledge of how to navigate the country’s politics, being even more appealing to investors. In fact, internationally-focused SPACs could reignite interest in the space, he said.

“If you have a guy like Goodwin who is willing to put his money up, as well as do the due diligence on Chinese companies, that’s a great way for US investors to get into China,” Kang said. “And, of course, not only China, but any market around the world. If SPACs like Goodwin’s can go out there and give US investors good opportunities internationally, that can be a real second leg for the SPACs going forward.”