September 16, 2020

SPACs: What’s Behind the Craze?

For most people and businesses, 2020 has been a lousy year, but that’s definitely not the case for SPACs.  This PitchBook article explains how the events of 2020 have combined to make SPACs the investment vehicle of the moment from the perspective of sponsors, institutional investors & private company sellers. Here’s an excerpt about why SPACs have become a more attractive alternatives for many private company sellers than they have been in the past:

For at least the past three years, the lack of IPOs and shrinking number of public companies in general has been a hot button issue in the financial markets. The cost and arduous process of becoming a publicly traded business represents a huge burden to private companies that could otherwise find massive amounts of capital in the private markets. In our eyes, the reduced time commitment is the main advantage of SPACs for companies pursuing a path to the public markets.

Since the SPAC transaction functions more like an acquisition, the private company has to negotiate with only one party rather than a host of investors on a road show, which will typically smoothen the deal pricing process. A company can transition from identification to completion in around four to six months as opposed to the year or more it takes for an IPO. This reverse merger path also allows for more creative deal structuring and will likely result in a price closer to its true market value. SPACs offer the option to raise more capital than might be available in a traditional IPO by selling a larger proportion of equity either from the SPAC itself or a concurrent PIPE.

PitchBook expects that the current SPAC frenzy will fade once more certainty returns to the financial markets, but also expects that SPACs will remain a potentially attractive alternative for capital-intensive businesses and those with a complicated or long-term story.

Here’s another datapoint on the rise of SPACs – the NYSE recently proposed a rule change that would waive initial listing fees & the first partial year annual fee for any non-NYSE listed company that is the survivor of a de-SPACing transaction involving an NYSE listed SPAC. The change is intended to put these transactions on an equal footing when it comes to fees with those in which the already listed SPAC is the surviving entity.

John Jenkins