SPACs Must Be Evaluated Like Any Investment

There is a lot of talk about the stock market of 2000 and concerns of a bubble. Yet out of that dot com bubble came Amazon, Apple and many other invaluable innovative technology companies. Twenty years later that internet-crazed market is much more valuable than it was in 2000 and many more investment choices are available. In a similar way today there are surely bubble and overvaluation aspects of this market. The popularity of SPACs is simply a sign and not a cause. Many great companies will come to emerge from the SPAC process.

SPAC issuance still surging

2020 was a surprisingly good year for IPOs, but it was an even better year for Special Purpose Acquisition Companies (SPACs). There were 194 traditional IPO deals that raised $67 billion, the best year since 2014, according to Renaissance Capital. But it was an even better year for SPACs, which raised just about the same amount: 200 SPACs raised about $64 billion. If you combine IPO and SPAC volume of $130 billion, this number exceeds anything we have seen since the internet bubble. 

Investor protection in four forms

There are significant advantages to investors in using the SPAC process to launch a company. Four of them are listed below:

• Full transparency.  SPACs must file an S-4 when announcing a company they are seeking to buy that contains many of the same disclosure and risk outlines that are in the S-1 that an IPO must file.
• Sponsors with expertise.  Bill Ackman, Michael Klein, Chamath Palihapitiya and private equity firms like Solamere Capital and TPG Capital have all come into the space recently, lending credibility to the SPAC process.
• Ability to use forward-looking guidance.  Because the SPAC is a public company, when it announces the company it is buying, the SPAC is able to provide forward-looking guidance on the company. 
• An easy exit.  Investors unhappy with the target acquisition can get out by selling their shares before the acquisition is finalized.

Even staunch IPO proponents say there is room for both IPOs and SPACs. The SPAC offerings keep many money-losing stocks out of the regular IPO market, making these multiple choices a better quality structure for raising in the market.

SPACs are certainly mainstream by now. Well-known investors like Social Capital‘s Chamath Palihapitiya, The Gores Group‘s Alec Gores and Third Point’s Dan Loeb have relied on their reputations to repeatedly raise hundreds of millions of dollars through SPAC IPOs.

A SPAC reverses the IPO process, raising the money first and then acquiring a company. As such it is crucial to identify operators who can identify companies worth funding in the future, paying a winning price to get them, and beating the competition. The SPAC process is not much different than the private equity business except that it must be conducted in public and has a two-year window for completion.

PIPEs have evolved into SPACs. A PIPE (Private Investment in Public Equity) refers to any private placement of securities of an already-public company that is made to selected accredited investors (usually to selected institutional, accredited investors). 

SPACs and fees

The dream situation is where the SPAC can find some future great company before it goes public, thereby allowing retail investors who would not otherwise get to invest in pre-IPO companies to get in before the price pops up.

The flat fees and the percentage fees are well disclosed to investors in SPACs. The level of fees is reasonable and, the transparency makes it even better. SPACs provide a means for regular investors to invest in pre-IPO companies. Some of the most prominent SPACs have done quite well.

Another Wall Street creative idea

When all is said and done, the SPAC structure gives investors better access to new opportunities. SPACs are in direct competition with Wall Street banks and private equity firms who are all pursuing the next opportunity to invest in forward-looking innovative companies.

SPACs are a natural evolution in the markets. The founder of Zillow is a strong public advocate of SPACs and has publicly stated that he deeply regrets choosing an IPO for his company. At the end of the day, SPACs are just like any other investment and can be evaluated based on the quality of their management team, future expectations of their revenue growth and their ability to innovate in the future.