2020 Annual Review

SPAC IPOs ride the recovery

An LED display appears along Wembley Way in London. © Matthew Childs/Reuters
An LED display appears along Wembley Way in London. © Matthew Childs/Reuters

__Debt Finance and Capital Markets

SPAC IPOs ride the recovery

After a decade in the doldrums, special purpose acquisition companies are back in a big way 

Special purpose acquisition companies (SPACs) staged a spectacular comeback in 2020. According to SPAC-tracking company SPACInsider, 2020 saw a record 248 SPAC IPOs collectively raising US$83 billion in gross proceeds. That’s a long way from 2019’s 59 SPAC IPOs for US$13.6 billion and 2018’s 46 SPAC IPOs for only US$10.75 billion.

SPACs are shell companies organized by sponsors with operating and/or investing experience that raise capital by conducting an IPO and listing on a stock exchange. The resulting funds are then used to acquire or merge with an operating company within a specified timeframe, typically two years.

SPAC investors don’t know in advance where or when their money will be invested; for this reason, SPACs are sometimes called “blank check companies.” Finding a suitable target is down to the skill and experience of the SPAC’s management team, so investor confidence in their abilities is vital. 

Markets remain awash with capital. With public markets largely recovered from the turmoil at the start of the COVID-19 pandemic, investors are keen to buy new issuance, and SPACs have taken a substantial bite out of the market shares of traditional IPOs. Retail investors, many of whom are now spending a lot more time at home, have become a significant factor in a number of deals.

Pressure on the traditional IPO has been building for several years, as companies have sought alternatives to address perceived shortcomings in the IPO process. 

The opportunity to go public through a SPAC while sidestepping the traditional IPO process has obvious appeal given the potential for market volatility and other factors. With more and more SPACs raising capital and out looking for deals, high-quality target companies will likely find an abundance of opportunities to go public and raise capital while benefiting from the increasingly top-tier talent of SPAC sponsors.