Special purpose acquisition companies (SPACs) are by no means new. Since the 1990s, SPACs have existed across industries including technology, healthcare, logistics, media, retail and telecommunications. SPACs were known for helping smaller companies go public while offering more-than favourable terms to their sponsors. But it wouldn’t be until 2020 that SPACs would dominate the market for initial public offerings (IPOs).
From January to October 2020, some 165 SPACs were listed – nearly twice the amount of global SPAC IPOs issued throughout the whole of 2019, and five times that of 2015.
Some high-profile SPACs include banker Michael Klein’s SPAC Churchill Capital Corp III, currently acquiring health services company MultiPlan in a deal which is valued at $11 billion – the largest blank-check merger to date. Similarly, Spartan Energy, backed by Apollo Global Management APO, is merging with Fisker, an upstart electric-car maker, in a $2.9 billion deal.
Such high-profile SPACs have set an example for companies and investors, serving to prove that the traditional IPO route is not the only way to go public. In turn, 2020 has shaped up to be a record year for SPACs, who have raised a total of more than $72 billion – that’s more than the amount raised in the last 10 years’ worth of deals combined.
Also known as blank check companies, SPACs are created with the sole purpose of merging or acquiring another business and taking it public, offering a faster, less demanding route to making a debut on the stock market than the traditional IPO. Investors effectively write blank checks to SPACs to target and purchase high growth potential companies. In the Electric Vehicle (EV) market, SPACs are thriving, assisting tech start-ups to navigate the commercial landscape and avoid the complex paperwork that can come with the traditional IPO. With SPACs, it’s usually possible for those who invest to get their money back if they don’t like the company that gets targeted for acquisition, or if the SPAC is unable to find a suitable target to buy.
In the 1990s, SPACs had a reputation for taking small companies public for a large fee, which led to a high rate of failure and saw less than desirable performance on the stock market at the expense of investors. Much has changed since then; the adoption of regulatory changes triggered the transformation of the SPAC structure, and a new generation of SPACs were launched that offered a more sustainable investment vehicle.
Unlike an IPO, the SPAC route doesn’t require negotiation with multiple investors, nor does it come with uncertainty around the valuation of the company right up until the offering. What’s more, against a backdrop of a global crisis that has somewhat rewritten the rules about how markets work, raising money through an IPO is not a guarantee – perhaps unsurprisingly, start-ups seeking investment are looking for an easier, less risky route to going public. Selling to a SPAC comes with more certainty: a company only has one party to negotiate, and they already know the valuation. Further, while IPOs are subject to the erratic swings in market sentiment, SPACs are free of this – they can offer business owners a faster process under the guidance of an experienced investor. After a string of successful deals over the last year, it has become increasingly evident that listing via a SPAC is a great way for companies to acquire late stage growth capital. Virgin Galactic, Nikola Motor Co and DraftKings all went public via SPAC, further attracting interest in the sector.
While the SPAC hype is substantiated by the proven track record the investment vehicle has had in 2020, there are certain pitfalls to be wary of. For retail investors, SPACs may prove a risky vehicle – if they don’t like the merger, they don’t get to redeem their shares. Another concern around SPACs is the worry that some investors may be dissuaded in buying shares of a company opting for the SPAC route, since the level of scrutiny and due diligence required for a merger may be less than what is required for a regular IPO.
Otherwise, the expense for the target company can rack up. Sponsors pay nominal amounts for 20% of the SPAC shares before the acquisition, which can lead to a costly loss of equity for the target company. That said, the operating expenses involved in the process average 3-4% of total funds raised, which is still about half of the cost of a traditional IPO, and the private company negotiates an exact acquisition price.
The appetite for SPACs has skyrocketed in 2020; the latest big names to use the vehicle include online payments firm PaySafe, who announced plans to float on the New York Stock Exchange with a $9 billion listing via a SPAC named Foley Transimene Acquisition Corp II. The year isn’t over yet, and the asset class has already far surpassed the $13.6 billion it raised through deals in 2019. The traditional IPO market has soared too; IPO activity in the Americas saw 188 deals raise $62.4b in proceeds, Asia-Pacific saw 554 IPOs raise $85.3b in proceeds and activity in the EMEIA region rose quarter on quarter.
In 2020, we contend that SPACs have proven particularly popular as they have enabled both investors and target firms to fast-track the traditional listing process and some of the regulatory obstacles that come with this. It’s worth noting that all publicly listed companies have the same regulatory requirements once there, but it’s true that the timelines involved in SPACs are considerably shorter than that of the traditional IPO.
After a record year, 2021 is shaping up to be just as strong for SPACs. With two to three SPACs coming to market per day on average, there’s no reason this trend won’t continue into the new year. Already, SPACs have disrupted the status quo and and laid the foundation for high growth private companies to hit the public markets. If there were to be one iceberg in the distance to sink the SPAC ship, it would be supply: as SPACs boom in popularity, the ratio of SPACs to high growth target companies could skew and cause the SPAC trend to crash. This is unlikely to be the case for the foreseeable future: considering the uncertainty created by economic and social events of 2020, the advantages of blank-check companies such as reduced time, expense and uncertainty – not to mention an improving record of success – will continue to outweigh the drawbacks for companies eyeing up the public markets.
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