If direct listings were the most-talked-about way to go public in 2019, SPACs are the new direct listings.
Special purpose acquisition companies (SPACs) have been popping up in SEC filings left, right and center, with high-profile names often attached to them: venture capitalist Chamath Palihapitiya, former Speaker of the House Paul Ryan and LinkedIn co-founder Reid Hoffman have all launched these “blank-check” companies.
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And a few high-profile SPACs have shown investors and companies that there are other, simpler ways to go public rather than a traditional IPO, especially during uncertain times like the COVID-19 pandemic.
This has been a record year for SPACs, according to SPAC Insider, with nearly $36.2 billion in SPAC gross proceeds so far. That’s far higher than the $13.6 billion in gross proceeds for SPACs in 2019 or the $10.8 billion in 2018, per SPAC Insider.
What is a SPAC?
SPACs are essentially blank-check companies. SPAC founders form the company and go out and raise a few hundred million dollars through an IPO, with the intent of buying another company with the money they have raised.
A private company going public via SPAC has a few advantages over a traditional IPO, according to Benjamin Kwasnick, founder of SPAC Research. Private companies can go public on a faster timeline and there’s more certainty around a company’s valuation and equity capital raised, Kwasnick said in an email to Crunchbase News.
“A group of very successful deals over the past year have shown operating companies that listing via SPAC can solve a number of problems at once and be a great way to tell their story to the public market,” Kwasnick said. “Great deals have brought in higher quality sponsors who in turn are strong candidates to source and finance their own high quality transactions.”
Virgin Galactic, DraftKings and Nikola Motor Co. all went public through SPAC, meaning they were acquired by a blank-check company. The reputation of SPACs has improved over the decades as governance practices have also improved and made them more shareholder-friendly. For example, shareholders are now able to vote either in favor of or against a deal and still ask for their cash back.
“SPACs have grown up over the past few decades, as improved governance and great sponsors have made the SPAC listing a route that any company considering accessing the public markets is taking seriously in 2020,” Kwasnick said.
Why are IPOs under scrutiny?
SPAC Insider is a data and analysis firm founded by Kristi Marvin, who previously worked as a banker on these types of deals.
“The traditional IPO process is inherently risky, plus there had been a lot of talk particularly in the venture community not being satisfied with the IPO process,” Marvin said in an interview with Crunchbase News.
That’s led to conversations about going the direct listing route, and now the SPAC route.
Traditional IPOs have faced scrutiny lately mostly because of how they’re priced. Traditional IPOs are how many companies choose to go public, but it’s an expensive and extensive process. Part of that process (toward the end) is when bankers price the IPO—they assign a price per share and then a block of shares are sold at the set price to institutional investors.
After the block of shares is sold, the company’s stock begins trading on the public market. But that’s where IPOs have run into issues lately. Recently, there have been several companies that set a price underwriters deemed reasonable, only to see the stock surge on the first day of trading. That means public market investors are more enthusiastic about the company than was anticipated, and money was left on the table (i.e. the block of shares could have been sold for more).
When we say the stock surges on the first day of trading, we don’t always mean that it pops by, say, 50 percent. Lately it’s been upwards of 100 percent, according to data from IPO Scoop.
The Largest IPO ‘pops’ of 2020
- IPO Price: $24
- First Day Closing Price: $72.27
- Percent Change: 201 percent
- IPO Price: $31
- First Day Closing Price: $91.59
- Percent Change: 195 percent
- IPO Price: $22
- First Day Closing Price: $65.45
- Percent Change: 197.5 percent
- IPO Price: $20
- First Day Closing Price: $50.50
- Percent Change: 152.5 percent
- IPO Price: $29
- First Day Closing Price: $69.41
- Percent Change: 139 percent
Companies that are going public via SPAC
Autonomous vehicle and lidar tech company Luminar is one of the latest companies to go public via SPAC. And as noted above, DraftKings, Virgin Galactic and Nikola have also chosen to go public through the SPAC route. They’ve been acquired by the SPACs Diamond Eagle Acquisition Corp., Social Capital Hedosophia, and VectorIQ Acquisition Corp., respectively.
Pershing Square Tontine marked the largest SPAC to ever go public, according to Renaissance Capital, raising $4 billion. It has yet to identify a company to acquire.
This year also saw the largest SPAC merger between Churchill Capital Corp. III and Multiplan for $11 billion, along with the best first-day pop for a SPAC, with Therapeutics Acquisition popping about 20 percent on its first day of trading, according to Renaissance Capital.
Notable SPACs of 2020
Pershing Square Tontine Holdings
- IPO Price: $20
- Capital Raised: $4 billion
Churchill Capital Corp. III
- IPO Price: $10
- Capital Raised: $1 billion
- IPO Price: $10
- Capital Raised: $118 million
Why SPACs are so popular
This year has brought a “perfect storm” for SPACs, according to Marvin. When Virgin Galactic went public via SPAC last year, it received a lot of attention in the financial press. Having someone as high-profile as Chamath Palihapitiya helped put SPACs on the map.
And with IPOs being inherently risky, there was less incentive to take on more risk by going public in the middle of a pandemic and an election year.
“All things considered, all of a sudden a SPAC starts to look very attractive. And then on top of that you have all the really really big-name people being associated with these SPACs, which makes the deal even more attractive,” she said.
SPACs are also more established now that some high-profile companies have gone public via SPAC. More people know what SPACs are, so they are more receptive to conversations about SPACs, according to Marvin.
SPACs are here to stay, Marvin said, but she isn’t sure they’ll continue at the same rapid pace as this year. That said, there’s a two-year time period for a SPAC to make an acquisition, guaranteeing their staying power for at least a while.
Worth noting: In the past it was primarily “serial SPAC issuers” who were involved with SPACs, Marvin said. This year has brought out more players.
“This year we have a ton of new teams with SPACs that have never done these deals prior, so it’ll be interesting to see what happens,” Marvin said.
Illustration: Dom Guzman