Hundreds of blank-check companies are heading into 2021 on the hunt for a deal after yet another record-breaking year.
Once viewed as last resorts to take a company public, special purpose acquisition companies have entered a renaissance with private market investors and executives looking for more alternatives beyond the traditional initial public offering.
The awakening reached a new high in 2020 when SPACs stampeded into the public markets after the COVID-19-induced equities downturn of March and April. A record 218 SPACs, some backed by the likes of hedge fund billionaire Bill Ackman, former Speaker of the House Paul Ryan and Chicago Cubs Executive Chairman Tom Ricketts, debuted in the U.S. in 2020, according to S&P Global Market Intelligence data as of Dec. 17. SPACs, which are skeleton organizations that launch with the intention of buying and reverse merging with a private company, raised $74.49 billion in the process, Market Intelligence data show. The prior record for SPAC IPO proceeds was set in 2019 when 52 blank-check companies went public and raised $13.31 billion.
Now, Wall Street is readying itself for a barrage of SPAC-led deals in the coming years that could bring scores of private companies public and cement the vehicle's place as a credible alternative to the IPO.
"Going forward, the SPAC will be the right answer for many companies," said Carlos Alvarez, head of permanent capital solutions at UBS Group AG, in an interview. "I don't think this is a fad or a blip. The markets will ebb and flow, as they always do. But 2020 likely will be the year where SPACs have gone mainstream, and I don't think I can see a reversal of that in the future. I think they're here to stay."
SPACs have come to offer private companies a more certain pathway to the public markets, something that gained new value in the highly uncertain year that was 2020. Whereas institutional investors and underwriters guide much of the IPO process, a private company that works with a SPAC is technically doing so through an M&A deal. That allows the management teams of both the SPAC and the private company to negotiate everything from price to payout structures, all before the deal is publicly announced, industry experts said. A private company can also lean on internal earnings forecasts while discussing a merger with a SPAC.
Three dozen SPACs had closed acquisitions in 2020 as of Dec. 10, according to a recent note from analysts at Goldman Sachs Group Inc. who anointed 2020 "The Year of the SPAC." Among the companies that went public via a SPAC were DraftKings Inc., Global Blue Group Holding AG and Fisker Inc. The largest SPAC merger of 2020 came from Churchill Capital Corp III's $9.73 billion reverse merger with MultiPlan Corp., which had been a portfolio company of private equity giant Hellman & Friedman LLC, according to Goldman Sachs.
Heading into 2021, there are 205 SPACs with $61 billion in equity IPO proceeds at their disposal looking for an acquisition target, the analysts wrote. Using the 2020 ratio of SPAC equity capital to target M&A enterprise value of 5x, the combined enterprise value of those SPACs' takeover targets would be $300 billion, according to the note.
"There's going to be a heck of a lot of capital chasing deals for private companies in '21 and '22 to bring those companies public through reverse mergers," said Patrick Galley, CEO of Chicago-based asset manager RiverNorth Capital Management LLC, in an interview. RiverNorth, which oversees about $4.5 billion in assets, has been investing in the SPAC market since 2015, Galley said.
Pinning down the exact companies that SPACs could pursue is nearly impossible beforehand, though many do tell their prospective investors what industry they plan to focus their sights on. Of the 218 SPACs that launched in 2020, for instance, 51 intended to look at companies in the technology, media and telecom industries, 37 planned to go after healthcare companies and 24 were pursuing financial companies, a Market Intelligence analysis shows. There were 57 SPACs that launched with no expressly stated target industry, though.
Most of the new SPACs that launched in 2020 will have anywhere between 18 and 24 months to target a company to merge with, negotiate a deal and close the purchase, per the industry standard.
But blank-check companies can strike deals earlier, as some of the class of 2020 have.
Kensington Capital Acquisition Corp., for example, went public June 25, raising $230 million. The Kensington Capital Partners, LLC-affiliated SPAC then completed an acquisition of QuantumScape Corp. just five months later. Churchill Capital's deal with MultiPlan similarly came together just eight months after the SPAC was launched, according to the Goldman Sachs note.
According to Market Intelligence data, there are still a dozen SPACs that launched in 2019 that have yet to announce a deal. If a SPAC does not complete a transaction in that two-year period, the sponsors risk having to return investors' money and liquidate the structure.
"Come hell or high water, it's in the interest of the sponsor to find a deal," said Josh DuClos, a partner at Sidley Austin LLP who works on SPAC deals, in an interview. "That's the main event in the life of a SPAC."