The Ultimate Guide to SPACs
Decades from now, the 2020s could be seen as the decade of the SPACs in the same way that the 1980s are sometimes looked back on as the decade of conglomerates and LBOs.
In 2020, there were just under 250 SPAC IPOs in the US alone. By the end of March 2021, that number had already been exceeded with a total of 252. To put this in context, the average annual number over the previous decade was around 25.
We at DealRoom, deal management solution for SPACs, decided to take a closer look at the phenomen, the factors driving it, and whether the trend is likely to continue for the foreseeable future.
What is a SPAC?
A Special Purpose Acquisitions Company (SPAC) is a shell company that has been set up to raise money through an IPO, with the ultimate aim of acquiring a company. The only assets held by the SPAC are the funds that it raises during the IPO.
What is a SPAC Stock?
A SPAC stock allows you to invest in the pre-acquisition shell company established by the project sponsors. Again, when you buy a SPAC stock, there is no product, service or business model. You’re ultimately investing in the team behind the vehicle and the management team that they have in place. It’s not unlike investing in a Venture Capital fund, where ultimately you don’t know where your money will be invested.
Although there is a temptation to think of SPACs as being a new concept given their recent surge in popularity, they’ve been around for nearly 30 years.
The first SPACs arose in the United States back in the early 1990s at a time when ‘blank cheque companies’ were prohibited. SPACs offered a neat way for investors to work around the regulations that existed at that time.
However, this was traditionally considered a niche area of finance, occupied by boutique investment banks such as GKN Securities.
More than 20 years later, although their popularity had grown - particularly among companies looking to tender for government projects - the total SPAC market was worth less than $2 billion in 2014, with a total of 12 SPAC IPOs that year.
In 2020, these figures were $83.3 billion and 248, respectively.
How do SPACs work?
SPACs are essentially investment vehicles established by seasoned investment professionals that raise money through IPOs on the basis of the team behind them. There is no product or service just yet.
For now, you just know that the SPAC has been sponsored by a large Wall Street investment bank and that it has a management team that features some of the biggest names in a given industry.
SPACs can be thought of as search funds at the high end of the market. Search funds are similar in concept to SPACs, but usually involve recently-minted MBAs searching for SMEs to manage.
Like SPACs, the investment is made upfront, even before the MBA (or a team of MBAs) knows what company they’re going to invest in. But the same principal of having a competent management team in place also applies.
Why are SPACs suddenly so popular?
There are a multitude of reasons that have combined to make SPACs popular. These include the following:
- Stock Market Pull Factors: Stock markets make their money from IPOs and with plenty of liquidity in private markets, there has been less of a push for most private companies to go public over the past decade. SPACs give stock markets an alternative opportunity to increase their number of listings, so it’s something they’ll generally be happy to accommodate.
- Private Equity Exits: With the number of private equity exits in decline, SPACs provide investors with an excellent opportunity to bring private companies public, avoiding the need for industry sales. An article on Crunchbase went as far as to call SPACs, ‘today’s hottest exit strategy.’
- Global volatility: Over the past 2-3 years, we’ve seen several high-profile IPOs being abruptly pulled. SPACs offer a clever workaround for those companies planning to go public, obtaining a capital influx more quickly than would be possible with the traditional IPO route. Furthermore, the time to market is halved to about 3 months with a SPAC listing.
- Lower Barriers to Entry: SPACs are sometimes disparagingly referred to as being ‘the poor man’s private equity fund.’ While private equity funds often have quite restrictive terms about who is allowed in, the fact that SPACs are publicly listed means that there are no such barriers to entry. And with retail investing continuing to surge, one quickly feeds into the other to create a boom in SPACs.
- Demand for Diversified Financial Products: Booms in financial products are not uncommon. Until the SPAC boom came along, ETFs were all the rage. It’s the way these things work. When a few high-profile names become involved, as has been the case with SPACs, it fuels the interest in the financial product, leading us into a new cycle of popularity that looks like it will never end.
- Favorable Terms vs. IPO: Perhaps the biggest reason of all for the growing popularity of SPACs is that savvy investors have realized that they’re easier than traditional IPOs for several reasons. For ‘easier’, read: cheaper, faster, and less red tape. More on this in the next section.
SPAC vs. IPO: what is the difference?
For private companies, an IPO has always been the most common exit strategy.
But a series of mega-IPOs being postponed or cancelled over the past 2-3 years (think Uber, AirBnB, WeWork, and others) has perhaps forced many private companies into a rethink of this strategy. SPACs are far from a silver bullet, however.
Below, we contrast and compare some of the features of SPACs and IPOs.
SPAC advantages versus IPOs:
- SPAC listings are cheaper: SPACs underwriting fees and fees at completion (respectively 2% and 3.5%) are considerably cheaper than the fees required for an IPO (around 7%).
- SPAC listings are faster: A typical SPAC can be listed in three to four months. In the case of an IPO, it’s six months at the lower limit and anything up to a year at the high end.
- SPAC listings are less restrictive: While traditional IPOs prohibit forward-looking guidance, SPACs are allowed a 5-10 year timeline of projected financials, giving investors (in theory, at least) a better feel for the stock’s future prospects.
SPAC disadvantages versus IPOs:
- SPAC listings bring significant risks over an IPO: In the case of an IPO, you already know the company and its history; with a SPAC, you only know the investment and management teams. Without even knowing the company, investors open up significant risks.
- SPAC listings favor the founders: In most SPACs, founders keep between 20% and 25% of the equity, diluting the value of the company being acquired before things even get moving. In a way, this can be thought of as a premium for high-quality management, but it is a highly one-sided affair that undermines your investment.
- SPACs create perverse incentives: Because the founders only receive their share of equity if a deal is closed within 2 years, it can create the perverse incentive of them acquiring a company at any cost within 2 years, just so that they can obtain this equity share.
Famous SPAC Examples
- Diamond Eagle Acquisition Corp (Nasdaq: DEAC) acquired DraftKings for $304 million
- CIIG Merger Corp acquired electric automaker Arrival for an estimated $15.3 billion
- Supernova Partners Acquisition Company acquired Offerpad for $3 billion
- TPG Pace Holdings acquired Accel Entertainment for $400 million
- Opes Acquisition Corp acquired BurgerFI for $115 million
- Diamond Eagle Acquisition Corp (Nasdaq: DEAC) acquired DraftKings for $304 million in December 2019, merging it with SBTech, and creating what it termed at the time, “the only vertically-integrated pure-play sports betting and online gaming company based in the United States.”
- CIIG Merger Corp acquired electric automaker Arrival in March 2021 for an estimated $15.3 billion, making it one of the biggest SPAC acquisitions in history. The new company will be listed on the Nasdaq with the ticker ARVL. Arrival makes electric vans and buses and recently signed a deal with UPS.
- Also in March 2021, Supernova Partners Acquisition Company announced that it had acquired Offerpad for $3 billion. Offerpad is an Arizona-based proptech company that offers a one-stop shop to people buying and selling residential property.
- In November 2019, TPG Pace Holdings, a SPAC with the stated aim of acquiring a business in the media space, acquired Accel Entertainment, a leading gaming as a service provider in the United States, for $400 million.
- In March 2018, Opes Acquisition Corp acquired BurgerFI for $115 million, gaining access to one of the fastest-growing better burger concepts.