Maxim Manturov, Head of Investment Research at Freedom Finance Europe
Special purpose acquisition companies (SPACs) have long been part of the investment landscape, but this market has boomed in recent years. As well-known underwriters and investors show increased interest in the initial publication offerings (IPOs) of blank-check companies, SPACs have been pushed to the forefront of the agenda and there is even discussion around whether these will outpace the traditional IPO. Essentially, SPACs have become a very viable alternative for many private companies.
The SPAC boom is best exemplified by recent research from Refinitiv, which found that
SPACs have raised $79.4bn globally since the start of the year, eclipsing the $79.3bn that flooded into investment vehicles in 2020.[1] In fact, some studies report that SPACs accounted for a record 30% of all industry IPO earnings in 2020 and is already accounting for 54% in 2021, up from 1% in 2014.[2] The SPAC frenzy that commenced in 2020 therefore shows no signs of slowing, with 2021 set to be a record year for SPAC listings.
In light of this, with a long list of SPACs having filed for an IPO in 2021, it is imperative for companies and investors with growing appetites for participation to take a closer look before coming to a decision. So, let’s dive deeper into the rising popularity of SPAC transactions, the traditional IPO vs. the SPAC IPO and the future outlook for the thriving market.
The rising popularity of SPAC transactions
SPACs are non-commercial companies created solely to raise capital through an IPO in order to acquire an existing private company, thus bringing that company to the market. While SPACs have been around for quite some time –entering the investment landscape back in the 1990s– it is only recently they have exploded in popularity, as better-known underwriters and investors started taking part in them. This trend will likely grow as major private equity firms and venture funds continue to form more SPACs.
The reasons behind the rising popularity of SPAC transactions include low interest rates, simplified listing requirements, increased investor participation and the quantitative easing policies that are still adopted by most central banks. SPACs are also a great way to get exchange-listed during increased market volatility, as well as enable existing companies to gain access to liquidity that would not otherwise be available.
Ultimately, there are a range of factors that make SPACs a more sustainable option for raising funds, hence why target companies are increasingly looking towards SPAC IPOs to take them public. These factors, combined with the increasing number of high-profile sponsors entering the SPAC space, have enabled this market to soar. But will SPAC IPOs really outpace traditional IPOs this year?
The traditional IPO vs. the SPAC IPO
Traditional IPOs and SPAC IPOs are both subject to the same set of rules when taking a company public. When delving deeper into the benefits of these investment vehicles, however, there are notable differences. Compared to a traditional IPO, SPAC IPOs offer more certainty regarding the company value and fundraising, since the valuation is fixed through a privately concluded merger.
Alongside this, raising funds through SPAC transactions is one of the quickest ways for private companies who are in urgent need of capital. Getting ready for a regular IPO requires time, from a few months to a year, whereas creating a SPAC can be completed in just three short weeks. The benefits of this pace have been recognised none more so than amongst the ongoing pandemic, hence why investments in SPACs continue to surge.
One potential shortfall to point out, though, is the ability of SPAC IPOs to acquire a private company in the allotted timeframe. Once a blank-check company lists its security information on an exchange, it must complete a merger within three years or risks falling through, which creates added risk for buyers looking to invest.
In a nutshell, while SPAC IPOs can provide greater flexibility, efficiency and speed for target companies, they cannot wholly replace the reliability of traditional IPOs. Companies looking to go public must therefore weigh up the pros and cons of each option in line with their individual goals and capabilities.
The future of the SPAC market
That being said, many experts still believe that SPACs’ popularity will continue to grow in coming years as companies look to raise capital quickly and investors look to actively participate in this craze. This is demonstrated by initial stock market listings in 2021, which witnessed one of the best starts to the year since 2008, thereby highlighting that active participation in SPACs is undoubtedly growing. On top of this, with low interest rates and savings on commuting, food and coffee costs, COVID-19 has triggered an increased interest in investing amongst younger buyers.
But with so many SPAC options on the table, which ones are actually worth investing in?
- Stable Road Acquisition Corp – Expected to merger with Momentus. Momentus is a pioneer in space transportation and infrastructure technology and is at the forefront of space commercialisation. With an experienced team of aerospace, propulsion, and robotics engineers, Momentus developed a cost-effective and energy-efficient space transportation system based on a water-plasma propulsion technology.
- Social Capital Hedosophia Holdings Corp. V – Expected to merger with SoFi, a leading next gen financial service platform. SoFi’s mission is to help people achieve financial independence by taking correct money management decisions. This is a one-stop member-focused financial service hub that includes loan refinancing, mortgages, personal loans, credit cards, insurance, and investment and deposit accounts, with over 1.8 million users.
- Property Solutions Acquisition Corp – Expected to merger with Faraday Future. Faraday Future is a global smart mobile ecosystem company, the mission of which is to change the aspects of digital life when it comes to cars. The company already has a powerful portfolio of revolutionary value-added technologies, protected by nearly 900 patents worldwide.
The future
for SPAC transactions is therefore likely to be bright as private companies
increasingly look towards SPAC IPOs as a viable option to go public. With a
growing number of players entering the SPAC space, the SPAC frenzy is only gathering
pace.
[1] https://www.ft.com/content/321400c1-9c4d-40ac-b464-3a64c1c4ca80
[2] https://seekingalpha.com/news/3656255-piper-sandler-spacs-look-bubble-like-but-may-boost-goldman-sachs-and-evercore
