Summary List Placement
Special-purpose acquisition companies have become increasingly interested in legal-tech companies as the market has matured. But legal-tech companies seem to have mostly given the SPAC frenzy the cold shoulder.
Legal-tech leaders who spoke with Insider said they mostly saw SPAC offers as a way of driving competition with private-equity firms.
“The effect of the SPAC market on someone like me is that it drives valuations higher for PE transactions,” said Eric Elfman, the CEO and founder of Onit, software for enterprise legal management (ELM). “Private equity is where all the activity seems to be.”
There are other reasons that SPACs aren’t the best fit for legal-tech companies. There is a mismatch between what makes a good SPAC candidate and the limited number of startups that fit the bill, according to market experts who spoke with Insider. And recent heightened regulatory scrutiny of SPACs and fizzling prices for SPAC initial public offerings don’t help.
Historically, very few legal-tech companies have built up enough scale to go public. MyCase completed an IPO in 2014, followed by DocuSign‘s public debut in 2018, which put the valuation of the e-signature platform at $4.41 billion. The e-discovery platform KLDiscovery also went public in 2019.
Most legal-tech startups instead want to remain private and fuel their growth through combinations of strategic acquisitions, venture-capital funding, and private-equity investments, which have especially surged in the past year.
Legal-tech startups are ‘fond of the PE bubble’
At the end of 2020, the former chairman of the top-ranking law firm Kirkland & Ellis launched L&F Acquisition Corp., a SPAC with the goal of targeting governance, risk and compliance, and legal-tech companies. The blank-check company has not yet taken any companies public.
Many legal-tech companies would prefer to stay private and continue growing through the backing of private-equity firms, which have been pouring billions into the space. “I’m fond of the PE bubble — the valuations are stratospheric,” Elfman said.
SPACs’ entry into the legal-tech space would ratchet up competition between private-equity firms and SPACs, since the types of companies that would go public via a SPAC are those that would also be targets for PE investments, Mike Bryant, a partner at the private-equity firm Knox Capital, said.
Mitratech, a legal-management platform that’s expanded its services over the years, would’ve had enough heft to go public and been “perfect” for a SPAC, said Scott Mozarsky, who focuses on legal and compliance markets as a managing director at the investment bank JEGI. But Mitratech had its majority stake acquired in March for an undisclosed amount by a private-equity fund.
Similarly, the e-discovery giant Relativity could have taken the SPAC route but chose investment from the private-equity firm Silver Lake in March. The deal made Silver Lake its largest shareholder in March and valued the company at $3.6 billion, infusing it with enough capital to keep it running privately for at least the near future.
Legal-tech companies may not yet be ripe for SPACs
SPACs are typically best-suited for companies that are mature enough to have “critical mass,” with at least $500 million in enterprise value to get investors in the public markets excited, according to Mozarsky.
At the same time, those companies would have solid, but “not the A+,” assets in the market, since the “extremely attractive” ones would likely go down the private-equity, IPO, or strategic-investor route, Mozarsky said.
“The companies that are the best fit for a SPAC are ones with harder stories to tell, where maybe there’s something that isn’t obvious about them from the current metrics,” Jesse Wedler, a partner at the venture-capital firm CapitalG, added. “SPAC investors get excited about companies that are going to be transformative in one or two years.”
That said, most companies in the relatively nascent legal-tech space aren’t yet at a large enough scale to go public in the first place.
Elfman told Insider that Onit, which was founded in 2007, was still too small to go public right now, though it could do so in another couple years.
“The real question is whether the market is even ready for a legal-tech play at scale in the public markets yet. I’m not sure about that,” Elfman said, citing the relative scarcity of ELM, document management, e-discovery, and contract life cycle management companies going public. “Maybe the markets don’t have the appetite for something so vertically focused.”