If the recent boom-bust cycle of blank-cheque companies seems wild from the outside, imagine being in the midst of one of their deals.

That’s the reality for Li-Cycle CEO and co-founder Ajay Kochhar, who’s been working behind the scenes with a special-purpose acquisition company to assemble a final cast of investors ahead of his own company’s public offering, a deal that goes to a shareholder vote on Aug. 5. 

The Mississauga, Ont.,-based lithium-ion battery-recycling company is hoping to raise $615 million in gross proceeds from going public on the New York Stock Exchange with SPAC Peridot Acquisition at an expected valuation of US$1.67 billion, with plans to expand and capitalize on booming demand and scarce supply for battery inputs, from electronics to electric vehicles.

Kochhar’s experience reveals a rarely discussed dynamic in these go-public deals: the shareholders that buy into a SPAC stock are not always the right ones to carry the startup forward long term, or even to the day it debuts on public markets.

Unlike a traditional IPO, the comings and goings of SPAC investors is public knowledge, through SEC filings and share price movements. But amid the recent deal deluge—hundreds of SPAC deals were announced or priced 2020 and 2021, compared with less than two dozen in 2019—Kochhar said many founders are viewing the SPAC process from the inside for the first time, and encountering misconceptions about the investment process. 

“They’re actually, honestly, quite confusing,” Kochhar said in an interview with The Logic. “Even other entrepreneurs ask me, ‘If I do a SPAC, how do I make sure that I get the right shareholders?’ I didn’t have that awareness either before, but the reality is that you actually have multiple waves of shareholders that come in and out of the trust.” 

Peridot, for example, saw a big investor sell the majority of its stake over the first half of this year. Arena Capital Advisors sold 4.7 million shares of its SPAC, Peridot Acquisition, according to a June 29 SEC filing. Arena was the second-biggest shareholder of Peridot Acquisition, with 5.16 per cent of the shares out of 98 institutional investment managers that own 47.23 per cent, according to PitchBook data as of June 30. At the average price of US$11.92 a piece stated in the SEC filing, Arena’s sale would total nearly US$56.2 million. 

Los Angeles-based Arena said the final 836,907 share count in the filing was correct, but disputed the accuracy of the dollar figure, noting the duration of its selling spree. Peridot’s shares ranged from US$9.65 to a high of US$15.74 (on the day Li-Cycle’s involvement with the SPAC was formally announced.) Arena began selling before that time, Dec. 1, 2020, and stopped on June 23, at which point the filing said Arena is “no longer 10 per cent plus owners.” Arena president Sanije Perrett declined to comment on the reason for the sale, telling The Logic in an interview that the filing spoke for itself. 

Julian Klymochko, CEO of Accelerate Financial Technologies, said in an interview with The Logic that it would be “highly abnormal” for early SPAC shareholders to hold onto their shares rather than exit—and perhaps even against an investor’s mandate—because of the mechanics of the SPAC process. 

“​​We’re allowing the SPAC sponsor to basically rent our capital for two years. Their job—and they make a lot of money, if they do it right—is to find an attractive business combination. When they find that attractive business combination, their role is to basically sell the deal to the shareholders, and have those shareholders take out our shares such that we can reinvest our capital into new SPACs,” said Klymochko, who runs a SPAC-focused alternative ETF called the Accelerate Arbitrage Fund, speaking broadly of the SPAC market overall. 

“We’re buying on the IPO and exiting after the deal gets announced, but prior to closing.”

A Li-Cycle statement said Arena remains a significant and appreciated shareholder, and that other shareholders are now building positions, a factor that “certainly helped reduce the volatility from Arena’s sale.” 

Kochhar said there have been three waves of shareholders for Peridot. Prior to agreeing to the deal with Peridot, Li-Cycle had secured private investment from backers including Moore Strategic Ventures, TechMet, SDTC and Energy Impact Partners.

“The first wave, and group, is really what I define as the SPAC IPO participants. And that’s back when the SPAC was formed with Peridot last year,” he said. 

“For Phase 2, we’ve learned there are a lot of event-driven funds: hedge funds, for example. Around the time that these deals are getting announced, that’s what really drives their actions—that’s their investment philosophy,” he said. “The third phase, which is where I say we are now … is where we want to be, with the group of shareholders that have come in because they really want to own the company.”

Legal professors and researchers from New York University and Stanford University published a working paper in April that found that there is “an essentially separate group of investors that buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger, and these investors do very well.” But their analysis of 47 SPACs that merged between January 2019 and June 2020 found the costs built into the SPAC structure are “subtle, opaque, and far higher than has been previously recognized,” which could lead to losses for investors who own shares at the time of SPAC mergers.

Since then, it’s been a rollercoaster for shareholders in the broader SPAC market, particularly in the electric-vehicle industry.

Li-Cycle announced its plans to go public via SPAC with Peridot Acquisition on February 16. By March 24, 294 new SPACs had priced public offerings, on the heels of 115 SPACs completed or announced in 2020, up from just 22 in 2019, according to EY Canada, citing SPACresearch.com. 

On May 14, Bloomberg reported a “brutal” correction for electric-vehicle SPAC deals, tallying over US$40 billion lost from peak market capitalization across five companies: Nikola, Fisker, Lordstown Motors, Canoo and Arrival. By July 1, CNBC’s index of pre- and post-deal SPACs were down about four per cent and 10 per cent, respectively, year to date.

Yet Kochhar isn’t the only CEO still eager to enter the market. Swedish vehicle maker Polestar is reportedly in SPAC talks, while lithium-battery company SES is entering the fray.

Klymochko said he thinks the market is oversaturated with SPAC deals, but said the negative hype around SPAC mergers fails to acknowledge the wide range of both good and bad deals on the market. The auto industry, for instance, requires a lot of upfront capital, and Klymochko noted that even established automakers have filed for bankruptcy protection in recent memory.

“The companies going public by SPAC are still early-stage; they’re usually startups at the Series C, or Series D stage of financing. Many of them are not only pre-profit, but pre-revenue. If you know venture capital, a large portion of those companies fail, right?” said Klymochko.

Kochhar was also quick to point out the differences between Li-Cycle and others in the market. At a recent event on the de-SPAC process, Kochhar and co-founder Tim Johnston said the company’s economics work with or without government support for electric vehicles, thanks to its intellectual property and its ability to work with both manufacturing scrap and multiple types of batteries. 

“We’ve had a big influx of a pretty diverse shareholder base, those that really are engaged, long-term holders. We’re excited for that,” Kochhar told The Logic.

When it comes to issues like those facing Lordstown, “we of course keep an awareness,” Kochhar said. 

“But what we can control is our business, our fate,” Kochhar said. “We’re all very fundamentally driven people…. Sometimes businesses approach it the other way. They try to fit a business into a funding scheme. That’s no way to reach success.”