Return of the SPAC
Oh my god.
It looks like one of my favorite feats of financial engineering might be mounting a comeback. From The Financial Times:
New fundraising [for SPACs] has been improving slowly this year, rising about 20 per cent over the same period of 2023 to $3.1bn, according to Dealogic, and advisers are expecting activity to pick up pace. More than 20 Spacs have filed IPO documents since the start of June, targeting a combined $4.3bn in fundraising. That compares with just $1.8bn raised in the entire second half of 2023.
“There are over 1,300 unicorns out there, and the exit route on both the IPO side and the strategic M&A side has been closed,” said Jimmy Fang, chief operating officer at Spac sponsor Explorer Acquisitions. “Even in the hottest tech IPO market ever, you’re unlikely to get more than 150 IPOs in one year. What happens to the remaining companies? . . . I’m not saying SPACs will fill the entire void there, but I certainly believe they can fill a sizable amount.”
SPACs, obviously, got overhyped in 2020 and 2021, considering that everyone from NBA champion Shaquille O’Neal to former Speaker of the House Paul Ryan launched a SPAC, and as the market grew frothier, the quality of “businesses” going public in SPAC deals deteriorated.
Electric vehicle startups with no revenue, electric scooter startups with broken business models, marijuana seller review platforms, and rare earth metal-based battery producers not expected to be cash flow-positive for six years all went public through SPACs, and, as you could guess, most didn’t perform too well in the public markets.
However, not every company that went public through a SPAC was a bad company. School bus manufacturer Blue Bird, IT infrastructure provider Vertiv, sports betting platform DraftKings, and potato chip maker Utz all went public through reverse mergers with SPACs, and they’ve fared quite well in public markets. The issue is less “SPACs” and more the quality of a company that looked to go public through a reverse merger with a SPAC.
SPACs provide an expedited IPO process with less regulatory hurdles than traditional IPOs. In 2021, the public market appetite for new listings was massive, so “good” companies had no trouble going public through an IPO, and the only companies willing to do a SPAC deal would have been those that couldn’t attract the investor interest needed to support a traditional IPO (for context, Blue Bird, DraftKings, and Vertiv all announced their deals well before the pandemic, and Utz announced its deal in June 2020, before valuations got crazy). Naturally, many of these companies had no business being public.
However, IPO markets are now frozen, many venture and private equity investors need exits to return capital to their investors, and many of their portfolio companies are either 1) worth more than $1 billion, 2) profitable, or 3) both. If the IPO market remains cold, SPACs could become an attractive alternative to get portfolio companies to the public markets.
