Equity and fixed income markets saw an explosion of capital raises throughout 2020. In fact, the trend — which continued into 1Q21 — drove record volumes in the equity new issue markets. This was largely due to global central bank coordination providing much-needed monetary and fiscal support in response to the uncertainty and volatility created by the COVID-19 pandemic. Their efforts essentially reopened capital markets and restored liquidity more broadly.
One of the key themes that emerged in this period was the proliferation of special purpose acquisition companies (SPACs) as an alternative to the initial public offering (IPO) process. A SPAC — or blank check company — is a shell structure listed on an exchange and established for the sole purpose of acquiring a private company. Figure 1 shows the rapid rise of companies going public in 2020, including the significant growth of SPACs.
Companies going public either by IPO or by merging with a SPAC raised a record US$96.3 billion in the first quarter of 2021 versus US$83.3 billion in all of 2020.1 Within these record volumes, SPACs have grown from fractional market share to more than half of current issuance. So, what drove the rapid expansion of SPACs in particular? The growth was largely due to their ability to provide target firms a faster glidepath to going public.
Recent trends in SPACs’ performance, regulations, and public perception
In the wake of this growth, SPACs have seen some changes to their market environment. Given that a SPAC is a publicly traded company whose only asset is cash, it is reasonable to expect them to trade relatively flat after going public, with the potential for a small premium for those with strong management teams and proven track records. But, in the first quarter of 2021, we saw SPACs trade at +2% above their issue price on average, with some trading as high as +20%.2 This trend highlights the support they were receiving from both retail and institutional investors, despite a lack of fundamentals.
In recent months, however, we have watched performance become more uneven as the number of SPACs looking for an acquisition seemingly significantly outweighs the number of quality target companies available. Additionally, the velocity of a few high-profile deals has sparked inquiries from US regulators, further dampening interest in this structure. The pace of acquisition has also raised questions more broadly about how much due diligence is being performed under such short timelines.
Bottom line for SPAC investments
As we watch the SPAC frenzy of 2020 and early 2021 pause in the wake of heightened regulatory scrutiny, there are still more than 400 SPACs searching for acquisitions across what appears to be a dearth of potential targets.3 Where do we go from here? In our view, the pause in SPAC popularity is probably healthy for the market, as participants reassess the risk/reward of various alternative investment vehicles relative to their own risk tolerance. Time will tell if investor interest in SPACs will reemerge or if regulatory scrutiny will discourage interest for the long term.
1Source: Dealogic. Data as of 31 March 2021. | 2Source: Citi, April 2021. | 3Source: BTIG, March 2021.