The Year of the SPAC

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Last Friday, eight special purpose acquisition companies (SPACs) were priced. This was a record number in a week with the potential for raising over $3.25 billion. SPACs are also known as blank check companies, and though they have been around since the 1980s, interest in SPACs has increased over the last few months.

According to SPAC Data, there have been 128 SPAC IPOs in 2020 compared to 59 in 2019. As of September 16, 82 SPACs have gone public this year to raise around $31 billion. So you could call 2020 the year of the SPAC. 

Basically, SPACs raise money through an IPO just like any other company that’s looking to go public. Then within a two-year period, that blank check company puts it in a trust while a sponsor searches for a business or businesses to acquire. Principal at Renaissance Kathleen Smith said this:

It’s a back door to going public and avoiding scrutiny. You hear about the moonshots, like DraftKings and Virgin Galactic, which have done well, but the average return is negative. You can’t just blindly go in and make money. 

DraftKings is an American daily fantasy sports and sports betting operator. Users can enter daily and weekly fantasy sports-related contests and win money from those contests. The company was able to go public earlier this year because it merged with the SPAC Diamond Eagle Acquisition Corp and gambling tech business CBTech Global. Since that merger, it was renamed DraftKings and the company has been up by over 200% — even as sporting events were canceled by the coronavirus pandemic. 

This route to going public has started to attract a lot of companies. Obviously, it doesn’t work for everyone. These businesses tend to be more mature and have strong financial health. They don’t have to rely on the hype and marketing that is involved with the IPO process.

Billionaire Richard Branson, the founder of Virgin Group, is hoping to raise $460 million in a new SPAC deal. His VG Acquisition Corp. has filed to go public to acquire an existing business. It plans to sell 40 million units at $10 per unit on the NYSE. In its filing, the company said:

We are focused on effecting a business combination with a target that operates in one of the Virgin Group’s core sectors: travel and leisure, financial services, health and wellness, technology and internet-enabled, music and entertainment, media and mobile, and renewable energy/resource efficiency.

This wouldn’t be the company’s first SPAC deal. Last year in October, its spaceflight company Virgin Galatic went public through a SPAC deal. These types of deals seem like the right path for companies because IPOs and direct listings can be time-consuming and can create a lot of hype or bad press which would affect a company’s IPO. George Arison, co-CEO and co-founder of Shift, a tech-enabled service for buying and selling cars that went public through a SPAC deal earlier this year, said: 

A traditional IPO typically takes longer than a SPAC and those additional months can introduce more deal uncertainty than if you go through the much speedier SPAC process.

In today’s market environment there are many different events that have caused market volatility and uncertainty. The process of review by the SEC for an IPO can add months to the timeline of going public, and a lot can change in that time. Heck, a lot can change in a day. Sometimes a quicker way of going public is better for a company.

Josh Harris, a co-founder of Apollo Global Management, had this to say about the SPAC trend:

There’s a real need for quick, confidential capital and price certainty and for sponsorship in the markets. And most of the SPACs that have been done have been more emerging growth SPACs, less cash flow more growth.

On Friday, former Uber executive Emil Michael joined the SPAC trend and filed with the SEC for a public offering of $250 million for DPCM Capital, a tech-based blank check company. The company plans to sell 25 million units at $10 each on the NYSE. These SPAC deals will continue after 2020, especially when they prove to be successful and are more accessible to investors.

2020 has really highlighted SPAC deals as businesses needed to adapt to a market filled with many uncertainties and make the best decisions the future of their businesses. These types of SPAC deals will continue in 2021 and become another viable route for businesses to go public.

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