With firms from Wheels Up to 23&Me choosing to go public via SPAC, Special Purpose Acquisition Companies are currently enjoying a rapid return to the spotlight. In 2020 there were 248 SPAC Initial Public Offerings (IPOs) worth US$83bn; in 2019 there were 59 worth US$14bn – it is clear to see their massive jump in popularity (1). Rather unsurprisingly, 2020 was also the year of the largest SPAC so far, with Bill Ackman’s Pershing Square Tontine Holdings raising US$4bn (2).
SPACs are not a new phenomenon; in 1993 the investment bank GKN Securities helped the future of the first blank-cheque companies. They regained popularity between 2003 and the pre-financial crisis, with 2006 a particularly successful year for SPAC’s, with 66 IPOs (1).
However the financial crisis put an end to the initial boom, primarily as a result of various factors including greater market regulation. Most significantly, the success of SPACs requires there to be a supply of private businesses willing to go public; this condition was not fulfilled during the recession. As a result, SPACs were unable to find companies before their deadlines, thus many had to liquidate (3).
For example, Britain’s Chardan led its 2008 China Acquisition Corporation aiming to acquire a Chinese company – they were unable to find a suitable company within the time so changed focus in order to look for opportunities in a very different market, namely foreclosures in Florida. Additionally, there were problems related to the due diligence requirements and the continuing failure led to it trading at around 14% below its IPO prices in January 2009 (4) . These continued failures led to their eventual bankruptcy. Furthermore, during the financial crisis, many SPACs had to liquidate as a result of failing to find willing private companies.
The consequence of this was stark. There was only one SPAC IPO in 2009, a number which gradually increased in the following years – however the sudden increase in 2020 both in terms of the IPO count and total gross proceeds really stands out. This begs the question, what has stimulated this sudden comeback?
McKinsey reckons the most significant reason is the emergence of “leaders with an operational edge”(5). They attribute the growth, that begun in 2015, to three key factors:
“More closes, fewer liquidations”
“More well-known participants”
These factors combine to explain the rebirth of SPACs, as they have become more organised and consolidated a stronger reputation in recent years, creating a positive feedback cycle through a stronger distinction in attracting bigger names. Many high-profile companies and investors are now involved, with leading private equity firms such as Apollo creating SPACs like Apollo Strategic Growth Capital (NYSE:APSG) (6) and individuals such as Narayan Ramachandran (Former Head of Morgan Stanley India) leading them (7). This provides greater security as investors have the comfort in knowing that those leading the SPACs are leaders in their field with strong direction and expert specialist knowledge; this is further reflected in the reduction in the proportion of SPACs needing to then liquidate.
This helps reinforce the reasons why SPACs can be a more ideal channel of raising funds as opposed to traditional IPOs. IPOs have additional costs of high bank fees and share underpricing, as underwriters tend to set initial prices lower than their potential in order to guarantee investor demand – this leads to the company raising less money than would be feasibly anticipated.
SPACs have also been used to promote diversity and encourage gender equality in the workforce. Perella Weinberg Partners have established a SPAC focussed on investing in businesses that are owned by and run by women (8) – as well as using a SPAC to go public themselves. This is a unique and particularly innovative way of actively encouraging greater diversity, a move that may be followed by other firms.
However, some, such as Goldman Sachs’ David Solomon, have warned that the recent boom is unsustainable (9) stating that the process and the incentives involved are “still evolving”. According to the analyst, there is a big difference between firms choosing to go public via SPAC versus firms who are going public in this manner as they are unable to finance other alternatives. Others argue that it is similar to private equity but simply a less secure investment with lower returns. Whilst the SPAC promoters take a similar 20% of the equity for finding the target companies, private equity firms often have a more structured and expert process at analysing potential picks. Moreover, private equity firms balance investments across a diverse portfolio over various different companies rather than a riskier select few (10).
This worry is further backed through the mediocre short-term performances of investor-led SPACs within a year of merging. SPACs led by operators did indeed outperform the market index, but the outcomes for investor-led SPACs are less promising. A year after merging, investor-led SPACs average share price falls to almost 70% of their original share-price (5). The success of operators could be attributed to many factors, namely that they are usually industry-specific (the industry chosen to complement the expertise of the operator) leading to a narrower, more successful search. However, this just further backs the argument that if the new model of SPACs is adopted then it can be expected to deliver more prosperous results with a reduced danger of decline when there is an economic downturn.
It will be intriguing to follow the trends surrounding SPACs to see if Solomon is indeed correct or if this new ‘highly-organised’ SPAC will become even more common, displacing the traditional manner. The COVID-19 pandemic has been a significant disruptor; it’s role in accelerating the use of SPACs has so far been through providing a transaction with lower risk for the company going public in a time of uncertainty.