KnightSwan SPAC will focus on the GovTech combination (NYSE:KNSW)

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A Quick Take on KnightSwan

KnightSwan Acquisition Company (NYSE: KNSW) sold for $230 million in an IPO at a price of $10.00 per unit, under the terms of its latest S-1/A regulatory filing.

SPAC (Special Purpose Acquisition Company) intends to pursue a merger with a technology solutions company in government and related commercial markets.

KNSW management has significant relevant experience in the industry they are targeting, but no SPAC track record, so I’m holding on KNSW at this stage.

KnightSwan Sponsor History

KnightSwan has 2 executives leading its sponsor, KnightSwan Sponsor LLC.

The sponsor is led by:

  • Chief Executive Officer, Ms. Brandee Daly, who was previously the founder and CEO of C2S Consulting Group, a provider of cybersecurity solutions for the US federal government and prior to that, was a federal account executive at Amazon Web Services.

  • Board Chair Ms. Teresa Carlson, who is currently President and Chief Growth Officer at Splunk (SPLK), an enterprise software company.

The SPAC is the first vehicle of this executive group.

KnightSwan’s SPAC IPO Terms

New York, NY-based KnightSwan sold 23 million units consisting of one Class A common stock and one-half warrant per share at a price of $10.00 per unit for gross proceeds of 230 million dollars, not counting the sale of the usual options of the underwriters.

Each warrant is exercisable at $11.50 per share 30 days after the completion of the Company’s initial business combination and expires five years after the completion of the initial business combination or earlier upon redemption or liquidation .

SPAC has 24 months to complete a merger (initial business combination). If he fails to do so, shareholders may redeem their shares/units for the remaining IPO proceeds held in trust.

Stock symbols include:

Founder Shares represent 20% of total shares and consist of Class B Shares.

The SPAC sponsor also purchased 13.1 million private placement warrants at $1.00 per warrant in a private placement and with most of the same terms as the public warrants.

The conditions for the SPAC to effect an initial business combination include the requirement to purchase one or more businesses equal to 80% of the net assets of the SPAC and a majority of the votes voting for the proposed business combination.

SPAC may issue additional shares/units to effect a proposed merger. If so, the Class B shares would then be increased to retain the 20% equity stake of the sponsor.

Comment on KnightSwan

SPAC is interesting because it’s one of the few I’ve seen that focuses on the GovTech sector, specifically the government cyber threat segment.

According to a 2020 market research report According to Grand View Research, the global market for cybersecurity products and services was estimated at $157 billion in 2019 and is expected to reach $305 billion by 2027.

This represents a projected CAGR of 10.0% from 2020 to 2027.

The main drivers of this expected growth are an increasing proliferation of online threats pursuing greater potential gain in the form of stolen information.

Additionally, the continued transition of enterprises and agencies from legacy on-premises systems to the cloud presents new security challenges that need to be addressed by the industry.

Additionally, the Covid-19 pandemic has exposed businesses to greater security threats, including due to a greater dispersion of corporate personnel in “work from home” environments.

Below is a graph showing the historical and projected growth of the US cybersecurity market by component:

US cybersecurity market

US cybersecurity market (Grand View Research)

Investing in a SPAC prior to the announcement of a proposed business combination is essentially investing in the senior management of the SPAC, their ability to create value and their previous track record of performance for SPAC shareholders.

So, in a sense, investing in a SPAC can be likened to investing in a venture capital firm as a limited partner.

In the case of this particular management group, there is no prior SPAC history, which is negative.

However, SPAC’s management has significant relevant experience in the specific area in which it hopes to create a business combination.

Although investing in a SPAC after the announcement of a proposed business combination may present less upside potential, I see no compelling reason to buy into KNSW now.

My short-term outlook on KNSW is neutral.

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