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APR. 09, 2021

The Hottest Asset Class as of Late

In 2020, we witnessed several different trend reversals due to the COVID-19 pandemic. Not only have we adapted to major changes in our work culture and lifestyles, but have also seen a major shift in the IPO market: the rise of Special Purchase Acquisition Companies (SPAC). 2020 was quite the year for SPACs. In fact, they made up most of the growth in the U.S. IPO market, raising tripple the amount they did in all of 2019.

What are SPACs?

According to the U.S. Securities and Exchange Commission, a SPAC is a “development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These companies typically involve speculative investments and often fall within the SEC’s definition of penny stocks or are considered microcap stocks.”

In other words, SPACs are shell companies with no actual commercial operations but are created solely for raising capital through an Initial Public Offering (IPO) to acquire a private company. This is done by selling common stock, with shares commonly sold at USD 10 a piece and a warrant, which gives investors the preferrence to buy more stock later at a fixed price. Once the funds are raised, they will be kept in a trust until one of two things happen: First, the management team of a SPAC, who are also known as “sponsors”, identifies a private company of interest, which will then be take public through an acquisition using the capital raised in an IPO. The second option, however, is if a SPAC fails to acquire or merge a company within a specified deadline (typically, this will be two years), the SPAC will be liquidated and investors are paid back their initial investments.

But what is the difference between a SPAC IPO and a traditional one?

There are several ways for a private company to go public, with the most common one being through a traditional IPO. However, those are subject to regulatory and investor scrutiny of its audited financial statements. 

Furthermore, keep in mind that not all IPO’s succeed. WeWork is perhaps the most infamous example of this. In 2019, the company withdrew its high-profile IPO, amid weak demand for its shares after massive losses and leadership controversies were made public during the process.

Another option, are so-called Direct Listings, which is how companies like Spotify (SPOT US) and Slack (WORK US) went public. This option saves a lot of fees, which are usually paid to middle-men, suche as investment banks (as in the case of traditional IPO’s). Of course, it also means there are more risks involved.

Lastly, there is the Reverse Takeover, where shareholders of the private company purchase control of the public shell company and then merge it with the private company, taking control of its board of directors.

What makes SPAC different and nowadays more attractive is that their track records depend solely on the reputations of the management teams. Since skipping the complex process of traditional IPOs, SPACs can typically list in a much shorter time period.

So, who will win in 2021?  IPOs and SPACs are both subject to the same rules of the game when going public:  much of it depends on market conditions. Therefore, an up market, and an improving economy, will be helpful to both. This year will likely see some big-name unicorns that will could use the IPO route to go public in 2021, including SpaceX (Space vehicles), Stripe (mobile payments), Waymo (Alphabet’s autonomous vehicle), and Instacart (grocery delivery).

Generally speaking, the outlook for SPACs is rosy. If the economy continues to improve, SPACs could be as solid in 2021 as they were in 2020.

We thank you for the continued support.