Blank-check companies have rushed into the U.S. markets at a record pace in 2020.
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A wave of funding for new special-purpose acquisition companies over the summer is showing few signs of slowing down heading into the final months of an already record-breaking year for blank-check companies.
SPACs have shed their checkered pasts in recent years to attract a new class of investors, executive teams and private companies. Now, SPACs are debuting in the U.S. public markets and striking deals at an unprecedented pace expected to continue for the foreseeable future, according to investment bankers, securities lawyers and other capital markets experts.
"It's not a four-letter word anymore. It's a useful, flexible corporate finance tool," Jeff Mortara, the head of equity capital markets origination at UBS Group AG who has been working on SPAC deals for more than a decade, said in an interview. "You're going to see SPACs become a mainstay."
Under the SPAC model, a group of executives raise money through the public and private markets for a shell organization that will be used to target and buy a private company, which will eventually take the publicly traded SPAC's place on a U.S. stock exchange.
New SPACs have stormed into the U.S. markets in 2020, accounting for nearly half of all IPOs during the year through Sept. 11, according to S&P Global Market Intelligence data. Proceeds raised by SPACs during their IPOs have hit a record high of $36 billion in 2020, nearly 3x more than the $13.31 billion in proceeds raised in 2019.
At the back end of the equation, SPACs have reached M&A deals with target companies throughout the year. Market Intelligence data show that there have been more than 40 acquisitions by SPACs in 2020, some of which have been of high-profile unicorns such as Nikola Corp., QuantumScape Corp. and, most recently, Opendoor Labs Inc.
From Wall Street to Silicon Valley, SPACs have evolved into a vehicle that appeals to an array of different market participants. Venture capitalists are using SPACs as another route to take their portfolio companies public, a quicker alternative that offers more control over the process than an IPO. Private equity giants have started to look at SPACs as a way of quickly spinning off assets in their portfolios into the public markets while maintaining a position in the company. And everyone from billionaire hedge fund manager Bill Ackman to former Speaker of the House Paul Ryan has found that SPACs are generating lucrative returns for their earliest investors.
"A lot of companies will look at SPACs differently than they did a couple of years ago. With these recent deals like Nikola, Fisker Inc. and Global Blue, it's more a way to get public and raise capital," said Jeffrey Smith, a partner in Sidley Austin LLP's M&A and private equity practice, in an interview. "It's not just a means to find liquidity for shareholders."
There are more than 100 SPACs actively on the hunt for a deal as of Sept. 11, about 17% of which are in the final year of their pursuits, according to Market Intelligence data. SPACs typically have a two-year window following their IPO to strike a deal. Included in the list of SPACs still looking is Ackman's Pershing Square Tontine Holdings Ltd., which raised more than $4 billion in its IPO earlier this year to make it the largest SPAC on record. Ackman has reportedly already held conversations with Airbnb Inc. about potentially taking the unicorn home-rental company public through a reverse merger, though executives at the company rebuffed Tontine's interest, according to Bloomberg News.
Concerns have risen about whether there are enough viable targets to match the spate of SPACs entering the public markets. But Warren Fixmer, a managing director at BofA Securities Inc. who runs the bank's SPAC equity capital markets business, is still seeing opportunities for SPACs in the market today.
"For every conversation we have with a new SPAC sponsor, there's multiple of that with potential targets," Fixmer said in an interview. "It's coming up in just about every single IPO conversation we have with a private company."
With the U.S. presidential election on the horizon and the COVID-19 pandemic ongoing — events that could trigger another bout of market volatility — companies may be more likely to consider a SPAC merger to go public in 2020 than they would otherwise. That is at least in part because combining with a SPAC allows the two sides to engage over price, whereas the opening price of a company's stock in an IPO is managed by Wall Street's biggest banks, a process that has caught the ire of notable venture capitalists such as Benchmark's Bill Gurley.
And yet, even with the surge of money that has been put into SPACs this year, the market's appetite for blank-check companies still has more room to run, according to UBS' Mortara.
"You're in the earlier innings with SPACs," Mortara said. "I think it's still nascent in terms of market share. It can be much higher than what it is now."