The new go-public vehicle that goes where SPACs don't tread

As a serious contender among Canada’s large stock exchange operators, NEO has not been shy about taking bold steps to help investors and capital raisers reach optimal outcomes.

In the past few years, the company has blazed a trail with numerous market-leading initiatives. Aside from helping to launch DealSquare, Canada’s first centralized private-placement platform, it has enabled better distribution of mutual funds and private offering-memorandum funds through its platform-traded fund (PTF) structure on the NEO Exchange.

It has also established itself as a well-respected venue for special purpose acquisition companies (SPACs). So far, 10 such blank-check firms – including the Subversive Real Estate Acquisition REIT LP, which was the first SPAC in history to convert into a REIT structure – have been listed on the exchange.

“I think that the stock exchange is a fundamental component of successful capital markets, and it is critical that we always listen to our stakeholders and think about new ways of doing things,” Jos Schmitt, president and CEO of NEO, told Wealth Professional. “That’s the hallmark of who we are. That is our DNA.”

It’s in that spirit that the firm unveiled its newest innovation: the G-Corp, a publicly traded acquisition corporation designed to address what Schmitt described as a “risk capital gap” in the Canadian financial markets.

‘There’s really a big void’

For companies seeking to go public, getting listed through a SPAC transaction is generally more convenient compared to the traditional IPO process, which has made SPACs the object of much excitement over the past year. But because of their sheer size, they overlook a vast swath of private companies with public-market ambitions.

“What we noticed, and what we heard also from our stakeholder community, is that SPACs are great vehicles for companies to raise capital and go public,” Schmitt said. “But at the same time, they're very large: the average size of a SPAC listed on NEO is $270 million, which means that the acquisition or merger targets are going to be often north of $1 billion.”

Smaller companies may also explore the possibility of raising capital on venture exchanges, which would involve transactions with smaller blank-check companies called capital pool companies or CPCs. But those go-public shells are focused on micro-cap companies still in the formative phases of business development.

“It's easy to find money at a very early stage and seed levels, and it's easy to find money once you are established,” Schmitt said. “But it's hard to find that money to enable quality mid-market growth companies. There's really a big void.”

Leveraging its experience built up from facilitating SPAC transactions, NEO held consultations with Canadian securities regulators and was able to come up with the G-Corp. Focused on high-potential growth companies with enterprise values between $50 million and $500 million, it offers an ideal solution that also addresses the needs of many investors.

“Typically, when the IPO takes place for a SPAC, it zooms in on larger institutional investors including private equity firms that have a lot of dry powder waiting to be deployed,” Schmitt said. “Those large investors are very keen to make substantial amounts available to SPACs because for them, it's a great chance to identify opportunities. For the capital raisers, it’s a way to generate a substantial raise with reduced effort.”

Smaller investors can also take a bite out of SPACs, though not necessarily on equal terms. Until a SPAC announces their qualifying transaction, the market generally adopts a wait-and-see attitude, which means there’s limited liquidity. Past that point, it becomes less easy for investors to make investments in the same conditions as those who participated in the IPO.

“We expect the average size of an IPO for the G-Corp to be between $10 million and $30 million, which is not meaningful enough to be enticing to very large private equity firms,” Schmitt said. “That opens an opportunity for a larger cohort of investors – family offices, smaller institutional investors, investment advisors and high-net-worth individuals – to participate in small- and mid-market firms that promise to be the blue chips of tomorrow.”

A surer go-public vehicle

G-Corps also have numerous advantages compared to CPCs, particularly with respect to investor protection. Capital raised in a G-Corp IPO is put into escrow, so it can’t be used to finance the work being done by the sponsor. Like most SPACs, a G-Corp has a timeline of 24 months to announce a transaction, beyond which the money has to be returned to the investors.

Shareholders in a G-Corp. are also given the power to approve or disapprove a qualifying transaction, as opposed to the SPAC mechanism where once a transaction is announced, investors are given the choice to redeem their capital and walk away.

“When SPAC investors are allowed to have a first look at a qualifying transaction, there tend to be a number of them who decide that it doesn’t fit their strategy or don't like it,” Schmitt said. “They pull out their money, putting the SPAC in the difficult position of having to manage those redemptions. We wanted to avoid that deal uncertainty with G-Corps.”

Finally, the resulting entity from a G-Corp transaction is a senior issuer, which means the company has to comply with stricter requirements and standards than issuers listed on venture exchanges.

According to Schmitt, a “substantial pipeline” of firms are getting in on the ground floor of G-Corps, with Canaccord Genuity and Wildeboer Dellelce LLP being the first to file their prospectuses. While the vehicle can be used in support of more classical industries, the winds of demand from both sponsors and investors are currently blowing in favour of the companies of the innovation economy.

“Right now, the activity is focused on biotech, cleantech, healthcare, fintech … that is where we see a lot of that need for capital as well as investor interest,” Schmitt said. “I think all those organizations are clearly part of where the world is going and will be enabling the economy of tomorrow, and there are a lot of opportunities for the G-Corp to play a role.”

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