A SPAC is essentially a shell company, created specifically to raise money through its IPO for an acquisition, with the target unnamed until the acquisition is announced (or “de-SPAC’d”). Since the target company is unknown to SPAC investors, SPACs tend to be created by large institutional investors or high-profile corporate leaders with a track record for delivering return on investment. Rather than waiting, some companies looking for access to capital have begun searching for SPACs that might acquire them.
While the concept of the “blank check company” has been used for decades, conditions in 2020 created a wave of SPACs that began to rival the traditional IPO market. This correlated with a noticeable increase of high-profile sponsors with the likes of Pershing Square, Apollo and Bain Capital, to name a few. Questions remain about the future of the SPAC market—some believe the financial instrument has lasting power, while others see its recent success as a fad that will eventually wane. More than 300 SPACs are currently searching for a target, and more startups will go public through the de-SPAC process in the coming months.
In early November, Brunswick Senior Advisor Stephanie Wakefield spoke with Ms. Marvin about the record-setting year for SPACs in 2020 and her predictions for 2021.
We’ve been a bit surprised at how massive the shift toward SPACs has been this past year. What do you think has really driven this sudden trend? Is this the beginning or has it peaked?
It’s not just one thing. It’s the confluence of a bunch of different things. But the long and the short of that result is it opened the eyes of a lot of people about the SPAC product as a truly viable IPO alternative. In prior years, there’s been a real lack of understanding about how they work. It’s a challenging product for people to understand.
Chamath Palihapitiya kicked it off a little bit. He is a very high-profile dealmaker and savvy marketer. When he announced Virgin Galactic—July of 2019 and they closed in October of 2019—he was all over the financial press. It was a very high-profile deal that performed very well, and it got people’s attention. They were going, “Well, hey, if Chamath is doing a SPAC, maybe I should look into this.” It got the conversation started.
The next thing that happened obviously is COVID—it had an influence on the SPAC market for a bunch of different reasons. One, the traditional IPO market is inherently risky to begin with. You could put together an IPO prospectus for six months or even longer, go on the road, and still have no idea how much money you’re going to be able to raise. In fact, sometimes you don’t raise any money at all—look at WeWork, for example. It’s an inherently risky process. It’s even riskier in a pandemic and even more risky in an election year.
When COVID hit, the traditional IPO market clamped down shut. But for the most part, the SPAC market remained far more certain. The shell company is already public, so there is a reasonable amount of certainty on how much cash you’re going to be able to get at closing. That’s much more appealing to a company in this type of environment.
Plus, in the past, a lot of these so-called unicorns didn’t have to necessarily go public early in the life cycle because the private market funding was just so abundant. But with COVID, private market funding dried up, too. However, these companies still needed a capital infusion of some sort.
It used to be a company would go public at an earlier stage and investors would be able to capture that growth from IPO to when the company became a large-cap company. Problem is, in the most recent past, those companies would just be funded by late-stage VC rounds and go public at a much later stage, so only a very few private investors could capture that growth. The SPAC this year has sort of inserted itself in that process as a means for earlier stage companies to go public. And now investors are able to capture that growth again. It democratized the IPO process for investors.
There’s also a key difference between the SPAC process now and in the past, in the vote and redemption process. Back in the 2000s, it used to be that you could only redeem your share if you voted “no.” Now, you can vote “yes” or “no” and get your money back. By removing that sort of barrier, it made it safer for sponsors since it reduced the risk of their deal getting voted down. That brought in a much better-quality sponsor. And that’s why you’ve seen, since 2015, the quality of sponsor and SPAC team has really improved. And that is also largely responsible for SPACs garnering so much interest, particularly this year.
This year, I get questions about these pre-revenue companies, these electric vehicle companies. I think people forget that that’s how companies used to go public in the past. It’s a bit of a return to the way that capital markets used to function. I think we’ve just gotten very used to billion-dollar unicorns going public. The ’90s and the 2000s had a lot of companies going public at a much earlier stage.