To SPAC or not to SPAC?
What is a SPAC? A SPAC is a special purpose acquisition corporation, also known as a blank-check company. They are companies that have no commercial operations and are formed as a vehicle to raise capital through an IPO for the purpose of acquiring a targeted company, quite often from private equity.
A SPAC is a special purpose acquisition corporation, also known as a blank-check company. They are companies that have no commercial operations and are formed as a vehicle to raise capital through an IPO for the purpose of acquiring a targeted company, quite often from private equity.
SPACs seek to raise funds from underwriters and institutional investors with the aim of raising money for an acquisition of a targeted company within a specific sector. The SPAC does not disclose which company is the target and the investors do not know who they are investing in until the acquisition is complete. The raised funds are placed in a trust, while the sponsor searches for a company or companies to buy. It’s similar to a backdoor listing, as we call them in Australia.
SPACs popularity has skyrocketed over the past 2 years, as more tech startups try to figure out which avenue is best for them to go public.
Why are we talking about this?
Since 2015 there have been 223 SPACs listed and this year alone 89 SPACs have IPO’d raising more than $41 billion as of September 24 — more than the last 10 years combined. In 2016 they were responsible for raising USD3.2billion and in 2019 a total of USD13.6billion. There is definitely a growing trend to use these vehicles as it allows these companies to face less scrutiny from regulators when wishing to go public via a SPAC.
From my observations it is especially relevant within the tech sector.
The companies being purchased by the SPAC’s are usually coming out of private equity portfolios so they are at a relevant maturity stage. This means the investment for the investor becomes all about the manager. In order to successfully raise money for a SPAC it definitely helps to have a reputable person with a great track record at the helm.
Recently a well known politician and hedge fund manager have both invested heavily in these particular listed corporations SPACs:
- Former House Speaker Paul Ryan will serve as chairman of a SPAC that is looking to raise about $300 million in an initial public offering; and
- Bill Ackman, Prominent hedge fund manager has created his own SPAC, Pershing Square Tontine, the largest SPAC created.
Kailish Concept, a quant analysis firm in the U.S, believes that these SPACs are partially responsible for the huge gaps that have spread between value and growth at record levels
The performance of SPACs historically has not been as sound as the returns on IPO’s. There have been 223 SPAC IPOs since the beginning of 2015 through to July 2020. 89 have completed mergers and taken a company public. Of those 223 companies, 89 have a -18.8% return, if calculated in straight share value, and a median return of -36.1%.Comparing this result with traditional IPOs which have returned a positive 37.2% since 2015.
The IPO market has a significant pipeline as we head into the 4th quarter. Currently there are 45 companies looking to go public with a total value of $8billion, according to an article from Renaissance Capital. Allegedly there are another 65 companies that have filed in private looking to raise an additional $28 billion. So we could have a total of USD $36 billion raised from now until the end of the year. In 2020 thus far there have been 111 IPO’s in the U.S, which have raised a total of $37 billion. 2014 was the last year we saw a higher value of raises when the U.S had 275 IPO’s worth a value of $85 billion.
So the question is – Are these investment vehicles a symptom of irrational exuberance, desperation, aka where else to invest? Or is the current positive trend within the equity markets here to stay?
There are a number of upcoming IPOs soon to hit the market. Reach Markets are expecting to list 3 exciting technology companies by the end of the year. If you are interested in hearing about these deals, please Register to be on the distribution list.
- Investopedia, Special Purpose Acquisition Company (SPAC)
- Market Watch, The ‘death of valuation’ and what it could mean for investors going forward
- Market Watch, 2020 is the year of the SPAC — yet traditional IPOs offer better returns, report finds
- SPAC Research, 5 October Newsletter
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