2020 was a big year for special purpose acquisition companies (SPACs). If you aren’t familiar with the term “SPAC,” it’s a company that has no business operations. Its main purpose is raising capital through an initial public offering (IPO), so it can buy and merge with an existing company to become publicly traded within two years. It has become an alternative way to go public. SPACs are created with the end goal of a merger, capital stock exchange, asset acquisition, stock purchase, and reorganization. Sometimes these are already planned out, and the SPACs already have a private company in mind to acquire or merge with. This isn’t a new process. SPACs have existed for a few decades, it’s just that they’ve recently picked up steam and attention.
Statista reports that as of December 3, 2020, SPACs had raised $71.8 billion in IPOs in the U.S. in 2020. According to SPAC Insider, in 2019, SPACs raised $13.6 billion in gross proceeds and $10.8 billion in 2018. So yes, this year has been a record-breaking one. The popularity of SPACs has grown quickly in the past few years. This alternative route to going public minimizes some of the hassles that come with a more traditional IPO. There’s no need to pay underwriting fees to big banks, and the company doesn’t have to endure marketing its IPO to potential investors.
The companies that have gone through with or announced that they would be using this approach range from clean transportation startups, like Nikola Corporation and XLFleet, to battery companies, like Stem and Eos Energy Storage. Even the popular online gaming platform DraftKings went public through a SPAC deal with SBTech. Popular entrepreneurs, hedge-fund managers, and celebrities (like Bill Ackman, Richard Branson, Michael Jordan, and Shaquille O’Neal) have all bitten off a piece of this trend.
Goldman Sachs has stated that SPACs looking for their next target could drive up to $300 billion in mergers and acquisitions in the next two years. The SPACs that went public in 2020 will have two years to find a company they want to merge with or acquire. If this doesn’t happen by the expiration date, the SPAC is liquidated and all of the funds it raised going public will be returned to investors. Unless a SPAC speaks publicly about a potential direction or deals it’s interested in, then you might be invested in a SPAC and just hoping for the best — that it’ll target a company with massive potential. There’s quite a bit of trust you have to put into the SPAC’s founder. You have to believe he’s going to make the right decisions that’ll benefit you and your portfolio.
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The Year of the SPAC
David Kostin, Goldman Sachs’ equity strategist, had this to stay about SPACs in a recent note to clients:
In history books, the year 2020 will forever be known for the deadly pandemic. Economists will study the unprecedented recession and recovery. Investors will note the swift 34% bear market and dramatic 65% rally. But from a capital markets perspective, this year will be undoubtedly be known as the year of the SPAC.
The growth in popularity of SPACs could be due to the sectors that SPACs tend to target — pharmaceuticals, technology, and electric vehicles — and heightened enthusiasm from investors who aren’t interested in nontraditional and early-stage businesses. Kostin added, “We expect a high level of SPAC activity will continue into 2021.” I agree; this trend will likely continue into the new year. The past few months have seen a record number of IPOs and IPOs from SPACs. It’s a rarity to see the IPO market this busy amid the year-end holiday season.
Recently, Bespoke Investment Group took a look at the SPAC space and noticed something really interesting that will help keep this boom going: Of the over 280 SPACs that have come to market in the past two years, there are only six that are down 10% or more from their IPO price. Fifteen have more than doubled from their IPO price. The company wrote, “In other words, more than twice as many SPACs are up 100% as down 10%. If that isn’t a sign of exuberance, we don’t know what is!”
SPACs are going to keep the IPO market busy into 2021, and it’ll be interesting to see what comes from these recent SPAC IPOs.
Until next time, Monica Savaglia Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.
