Avalon (NASDAQ:AVAC) has entered into a definitive agreement to combine with financial services firm The Beneficient Company Group, or Ben, at an enterprise value of about $3.5 billion.

The Dallas-based company provides customers options to exit alternative investments early via structures designed for high-net-worth individuals and small institutions.

Transaction Overview

Avalon is funding the deal with $207 million from its current trust supplemented by a $383 million asset PIPE made up of ”alternative assets, valued at 100% of their most recently reported net asset value at the time of such subscription, including lending money to Variable Interest Entities to finance their acquisition of alternative assets”.

The combination agreement allows for expanding this asset PIPE to up to $700 million as well as engaging in a more traditional equity PIPE, which may include warrants, worth up to $250 million. With these initial financing levels, Ben expects to add $167 million to its balance sheet after footing $40 million in transaction expenses.

Avalon must maintain Nasdaq listing requirements in order for the deal to close, including having at least 400 shareholders of at least 100 shares after redemptions are processed.

Existing Ben shareholders are expected to own 70% of the combined company at close with public Avalon shareholders taking 10% and the asset PIPE investors 18%. The SPAC sponsor’s promote shares are expected to convert to a 2% stake.

The sponsor has agreed to lock its shares all the way until December 31, 2029, but may be released early if the combined company trades at or above $18 for 20 of 30 trading days after December 21, 2024. The company, meanwhile, has agreed to a six-month lock-up but may be released early at the same $18 hurdle at least 150 days out from close.

Up to 250 shares from each company shareholder may be considered free from the lock-up, however. The company’s preferred B-1 and B-2 shareholders are subject to a one-year lockup but one quarter of their holdings are to be released early on the each of the 91^st, 181^st, and 271^st day following close.

Should the deal be terminated, Ben is required to reimburse Avalon for up to $1 million in expenses and pay the trust contribution to extend Avalon’s transaction deadline to July 8, 2023.

Quick Takes: Ben is hoping to cash in on a market that is in cash-out mode.

It has been set up to allow high-net worth individuals (HNWIs) and small-to-midsize institutions (STMIs) gain liquidity from their long-term alternative investments and other structured assets that would otherwise be locked into fixed maturity durations.

Ben believes that HNWIs and STMIs hold about $2.1 trillion in assets between them and will seek to gain liquidity on about $50 billion annually of this currently, with that demand growing to $106 billion annually over the next five years. The firm believes it is also well-positioned to capture 1% of the $133 billion estimated current demand (growing to $229 billion over the next five years) for liquidity from such assets global large institutions hold.

To provide these liquidity options while alleviating as many costs as possible, Ben has established a trust with many cogs in its wheel. One of these is to make a Kansas-based charity the official beneficiary of these transactions. Charitable organizations in Kansas receive a portion of the 2.5% financing fee collected from TEFFI customers who finance their alternative assets via Kansas trusts.

When a customer seeks to exit an investment, they receive consideration in cash, equity or debt securities.. Ben’s trust company makes the loans and holds the assets, while its other subsidiaries collect a range of transaction and subscription fees.

In one illustrative example, Ben’s presentation shows a customer looking to offload a $1 million asset with assumed 7% annual growth with five years left until its distribution. Ben would offer this customer a $750,000 consideration for this asset, in this case in the form of an equal amount of Ben common stock.

Ben would further collect a 7% platform fee from its AltAccess subsidiary, a 2% transfer agent fee and 2.6% broker-dealer fee from its Ben Markets cog as well 0.25% from Ben Insurance in providing an insurance policy covering the alternative asset’s transfer risks.

In all, Ben is getting the asset for effectively $0.70 on the dollar, which includes $130,350 in fees that come out of future cash flows produced by the asset. After adding in other recurring subscription fees and premiums customers pay for being connected to its platform, Ben gains $384,253 on this transaction for a 51% total return over five years.

These are obviously handsome returns, but they do require Ben to hold the bag for a period of time while that asset matures. The inclusion of Ben common stock into transactions as consideration could also have unforeseen effects on the company’s public market volatility.

But, so far, Ben has sourced a total of $7.5 billion in assets through its existing model since 2020. Most of this has come through relationships on the advisory side including family offices and various institutions and insurance groups. But, others have come via wealth management firms and it aims to open a direct-to-investor channel in the fourth quarter of this year.

The filed presentation did not include any projections, but in 2021, Ben generated $76.7 million in total revenue for a GAAP operating loss of -$71.1 million. This means that Avalon is valuing Ben at effectively 46.3x its 2021 revenue. Its most direct competitors – CAIS, Moonfare, RealBlocks and iCapital – are all private, but this is still a fairly hot multiple at that enterprise value for the financial services sector without proven profitability.

By comparison, BlackRock (NYSE:BLK) trades at 4.9x current revenue and Blackstone (NYSE:BX) at 4.6x. But, these are broad-based organizations and are in fact the issuers of a lot of the alternative investments that Ben’s thesis says investors are trying to get out of.

The robust multiple also parallels that of a much smaller recent deal – East Resources’ (NASDAQ:ERES) proposed merger with Abacus Life – that nonetheless involves a high-growth firm offering liquidity finance. Abacus, which securitizes life insurance policies, was valued at 26x its 2021 revenue.

Click here for the full investor presentation.

ADVISORS

• Lazard served as sole financial advisor to Beneficient
• Haynes and Boone, LLP acted as legal advisor to Beneficient.
• Houlihan Capital provided a fairness opinion to Avalon Acquisition Inc.
• Venable LLP acted as legal advisor to Avalon Acquisition Inc.