Pandemic SPAC Boom: Born for a Special Time in Business
308. This is the number of SPAC initial public offering (IPO) transactions as of April 15, 2021. In less than four months into the new year, the number of SPAC IPOs in 2021 has already exceeded that of 2020 by 24%. SPAC IPOs currently account for 77% of total IPOs in 2021.
US$99 billion. This is the value of gross proceeds these SPAC IPOs have raised so far this year, outpacing the number in 2020 by more than US$16 billion. SPAC IPOs have raised an average of US$324 million this year.
Why have you been hearing so much about SPACs recently? Well, Wall Street is currently experiencing an unprecedented SPAC boom. The number of SPAC IPOs since the beginning of 2020 accounts for at least 73% of all SPAC IPOs in the past decade. Most recently, multinational ride-hailing company Grab, Southeast Asia’s most valuable tech startup, has announced its plans to be listed in New York through a SPAC named Altimeter Growth. Many more high-profile startups are also seeking to be listed in the US. What is this SPAC madness all about?
What is a SPAC?
SPAC, short for Special Purpose Acquisition Company, is a legal entity that is formed to raise capital through an IPO for the special purpose of acquiring an existing company. This type of legal entity solely exists for the acquisition of another company who hopes to be publicly listed and has no business operations. Therefore, they are also known as “blank check companies”. SPACs are mostly facilitated by private equity or alternative investment funds (called sponsors) as an attempt to take advantage of the current market dynamics quicker than a typical private equity deal. They usually look for private companies with a promising future as acquisition targets and have about two years to complete the deal. If a SPAC fails to complete an acquisition before the agreed deadline, the sponsors must return all of the funds back to their initial investors from the SPAC IPO.
SPACs and COVID-19
SPACs have been around for many decades in the US. This form of public listing started as an opportunity for mid-market public investors to support experienced managers or entrepreneurs who’d like to secure more equity capital in early-stage funding. During the early 2000s, SPAC saw a slow surge in specific industries where financing is scarce and going public is relatively difficult. Before the SPAC boom in 2020, Burger King was one of the high-profile publicly traded companies that went public through a SPAC IPO. Until recently, the outbreak of COVID-19 pushed this hot trend even further, making it one of the hottest topics in finance in 2020. This unprecedented leap in popularity for SPACs mostly occurred due to an uncertainty around capital raising under the impact of COVID-19. Many companies, including some high-profile startups, began to explore the option of securing funding through a SPAC IPO. SPACs have since become increasingly attractive to maturing startups all over the world who are interested in being listed on a major stock exchange for deeper liquidity, especially in the US.
SPAC IPOs vs. Traditional IPOs
Typically, when foreign startups want to be listed on an US stock exchange, it will take at least 6 months to complete. The process usually prolongs as the due diligence and filings required by the SEC need to present adequate and reliable information up to one of the highest standards in the world. Thus, it is common that a 7% underwriting fee is paid to the investment bank for these services. By going through a SPAC IPO, these foreign startups or private companies can enjoy a stock market entry within 2 to 4 months, much shorter than the regular 6-month to 1-year timeframe. Meanwhile, these companies are obliged to less complex regulatory requirements, driving down the cost of their underwriting services to about 2% of total proceeds from the IPO. The startups also get to negotiate their valuations by evaluating both the short and long term forward-looking opportunities from an M&A perspective, which could easily add up to 20% to the sale price compared to a typical private equity deal during a traditional IPO process. At the same time, these startups can mitigate the risks involved in a highly volatile secondary market like last year (2020).
Big Names in SPAC
Since 2019, there’s been a few high-profile SPAC deals in the market. Virgin Galactic, a spaceflight company within the Virgin Group, was taken public by former Facebook executive Chamath Palihapitiya. Palihapitiya, known as the “SPAC King”, is a venture capitalist who is famous for facilitating multiple SPAC IPOs and is also responsible for sponsoring promising FinTech startup SoFi’s upcoming public listing through a SPAC merger. Earlier this year, Lucid Motors, Tesla’s biggest rival in the US, announced that it’s going public through a SPAC IPO. And most recently, Southeast Asia’s most valuable tech unicorn Grab has decided to get listed in the US through a SPAC with a US$40 billion valuation, which is set to be the largest SPAC IPO ever.
SPAC = New Exit Strategy + Innovation Development?
In the past, it has been difficult for most mature startups in Asia’s smaller markets to meet the IPO standards in the US. As for the startups who initially began operations in Asia, a SPAC IPO opens the door for an alternative exit strategy for maturing startups in the region. Since most of the secondary markets in smaller Asian countries are known to be driven by foreign investments with limited upside growth potential, being listed on a major exchange like the New York Stock Exchange, NASDAQ, or the Hong Kong Stock Exchanges could provide not only deeper liquidity, but also strong exposure to the major markets. International VCs could also have more confidence in investing in local startups since they could now bring their late stage portfolio companies to public with higher valuations by forming their own SPACs. The current boom in SPAC IPOs also gives great bargaining power to the target startups, potentially driving up its valuation price at listing. These alternative channels to capital markets provide both the founders and investors more capital to build out new ventures, accelerating innovation development in the local startup ecosystem.
Where do SPACs stand in life after COVID-19?
After reading up about SPACs from several sources, I’m sure many of you may wonder: Is SPAC really here to stay? Despite the alleged “bubble” in the SPAC market, this form of IPO alternative is here to stay. Although this blockbuster trend driven by a group of billionaire investors has raised many questions and criticisms, the celebrity involvement in this market boom has already caught the attention of regulators. Now, the SEC is working actively on strengthening its securities laws around accounting considerations involved in a SPAC IPO process, giving these SPAC IPO companies a closer inspection while cautioning investors of underlying risks. For individual investors, SPACs could possibly serve as a good investment once the red hot trend cools down in the future, given the sponsors have a good track record of managing investor’s assets. Outside of the US, SPACs are also catching attention around the world in countries like Hong Kong, Singapore, and India. Going forward, it is expected that SPACs will be an important driving force in the “new economy” in a post-COVID era.