2021 off to a SPACtacular Start
Updated: Feb 18
Famous names and a weird acronym and something about investing… Yes, it seems like everyone and their mother is launching a SPAC, which stands for “special purpose acquisition company”. Colin Kaepernick has a SPAC. Ciara has a SPAC. Shaq has a SPAC (SPACquille O’Neal?). SPACs are sometimes known as “blank check” companies since they are created solely for the purpose of merging with or acquiring an (undisclosed and/or unknown) business to take it public. A SPAC has no commercial operations, and its only assets are usually the money raised by SPAC sponsors, typically industry executives and finance types with experience in mergers and acquisitions. After a SPAC goes public, it can sometimes take up to two years to pick and announce its acquisition target.
After decades of minimal activity, SPACs raised nearly $26 billion in January 2021 alone, which is a monthly record per the New York Times. As you can see in the chart below, the growth trajectory in SPACs was somewhere between a hockey stick and the letter “L” in 2020.
SPAC Transaction Summary 2010-2020
Source: Renaissance Capital. Includes SPACs listed on the Nasdaq/NYSE/AmEx with a market value above $50 million. Excludes over-allotments. Includes SPACs currently scheduled to price before 12/31/20.
What’s with the SPAC boom and why now?
SPACs as an investment vehicle are not new. Back in the 80s, they were much less regulated, which sometimes led to fraud given the lack of transparency and investment of cash into thinly traded shell companies. In more recent years, tightened rules including requirements to register with the SEC and to hold investor cash in escrow have legitimized these structures. Their popularity in 2020 may be in part attributable to the pandemic and related market volatility, as SPACs can mitigate the volatility risk of IPOs and tend to perform better during stock market declines. Also, streamlined disclosure requirements and fewer parties at the negotiating table mean that deals can move faster via SPAC than through the traditional IPO process.
So, should you try to get in on this?
If your friend, hedge fund manager Bill Ackman, tells you it’s not too late to get into his SPAC, then go for it. In all seriousness, though, it is about knowing the sponsor and understanding their capabilities and track record. Overall, SPACs seem more attractive from the sponsor’s perspective than the investor’s standpoint for a few key reasons:
· SPACs generally have a two-year window to go public, so investor cash is sitting idly in escrow, and there may be an incentive to get ANY deal (rather than the best deal) done so that sponsors don’t have to return investor cash.
· Sponsors don’t owe a fiduciary duty to investors, and many don’t obtain third party fairness opinions on the valuation that determines what you are paying for the target company.
· Sponsors of SPACs are sometimes given large stakes, essentially for free, so the “skin in the game” argument may not hold water when considering alignment of interests between sponsors and investors.
· Finally, the success rate of SPACs post-acquisition so far has been mixed, at best – see the chart below.
SPAC Performance by Sector Post-Acquisition
Source: Renaissance Capital. Target section identified at time of IPO; may differ from sector of acquired company. Number of SPACs that have completed mergers and taken a company public, 2015-10/1/2020.
In conclusion, I will refrain from making a joke that the SPAC boom is spreading faster than the new UK strain of the coronavirus, which would be in very poor taste. Instead, I will remark with a twinge of envy that SPACs are going places that Americans can’t go right now as the trend just crossed the pond for a little European vacation with Louis Vuitton owner, Bernard Arnault, announcing that he is launching a SPAC focused on European finance. Clearly, SPACs aren’t going anywhere and can be effective tools for seasoned financial professionals and sponsors, but they should be approached with caution by the everyday investor.With this brief primer, hopefully you are now prepared to discuss the pros and cons of SPACs at your next awkward Zoom happy hour event. Cheers.