Return of the SPAC

December 31, 2020

SPACs came out this year kind of like a Gen Z’er with the next big tech breakthrough that they cooked up in their parent’s basement.  SPACs previous to 2020 had a spotty reputation as an IPO alternative and were relegated to the fringes of the finance world. 

Buy hey, 2020 is a different kind of year, especially so for SPACs.  According to PitchBook, there were over 66 SPAC IPOs in 2020, up from 30 in 2019. 

Quick primer on SPACs

  • SPAC = Special Purpose Acquisition Company, a publicly traded company with no operations and a warchest of cash with the sole purpose of acquiring another company.

  • It’s formed by a group of investors, called sponsors. They raise funds from other investors, and use the money to acquire an existing, privately held company.

  • The SPAC has two years to find and close a deal with a target company. If no deal is done, the money raised is returned to investors.

Some of the big SPACs that completed deals this year and notable people involved

  • Chamath Palihapitiya of Social Capital is the uncoronated SPAC king and completed a deal with his SPAC with Richard Branson and Virgin Galactic.

  • DraftKings, the sportsbook operator went public via SPAC with a $3B valuation at the time of IPO and has surged since.

  • Shaq, Bill Ackman, and even former House Speaker Paul Ryan raised monies for SPACs in 2020.

What made SPACs so compelling this year?
Theories abound, but a few things are clear:

Market conditions in March at the start of Covid.  Most likely, the surge was born out of necessity when the public markets all but dried up in March.  SPACs allow you to negotiate with one party instead of doing a road show to attract investors.  And, if a valuation cannot be agreed upon, you don’t do a deal.  That is a lot easier than going through all the time and expense to do a standard IPO and then having to pull it at the last minute.

Timing.  It also has the advantage of speed.  And when the market is full of uncertainty and volatility, getting into the markets fast makes sense before they turn on you and youre left holding the bag.

Ability to file forecasts.  Fast growing companies can use their hockey stick performance as a selling point to give investors more clarity on growth prospects.

The prognosis for SPACs in 2021
There are a lot of them out there that have to get deals done, ie. find companies to acquire.  If they don’t, then SPACs are designed to return the money to the investors, but the process can be rocky.  The bad apples could ruin the barrel and return SPACs to their former reputation of a less than attractive mechanism to go public.

And what’s more is there are now new rules on the ability to add fundraising to a direct listing.  This Twitter thread by VC Bill Gurley lays out clearly and simply how those new rules work. 

SPACs have 2 years to get a deal done, so we may have to wait and see what happens late into 2021 or beyond to get a clearer picture of how this experiment turns out.

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