September 20, 2021

SPAC Valuations: Propelled by Plenty of Hot Air?

A recent FTI Consulting study looked at the factors driving skyrocketing SPAC valuations, and what they found provides some reason for concern. Here’s an excerpt from the intro summarizing the findings:

What follows is a look at FTI Consulting’s findings, which show three significant trends: 1) SPACs and the resulting newly public companies are increasingly being traded based on multiples of forward revenue (not the more traditional multiples of historical revenue and earnings); 2) projection periods are growing longer; and 3) those forward revenues are projected to grow at much higher rates.

FTI looked at 216 out of 250 SPAC investor presentations that included projections, and found that almost two-thirds of announced de-SPAC mergers in the past year have been for pre-revenue, pre-EBITDA companies. That’s up from just one-quarter of such companies in the period between 2016 and early 2020.  These developmental stage companies assumed very high growth rates in their projections extended those projections out over a longer projection period than more mature companies.

How aggressive are the growth rates for these projections?  The median CAGR of projected revenues for SPACs over the last year was between 40- 50%, compared to 21% during prior periods – and the latest batch of projections covered four years, as compared to two and a half years in 2016.

John Jenkins