What is the deal with SPACs?
I know the history … they became a “thing” in the 80s-90s but were not fully within the domain of “mainstream finance,” re-emerged after the dot-com bubble when high-growth/early stage tech had trouble raising capital through mainstream IPOs, were on fire during covid because of low interest rates/high risk appetite/fiscal stimulus, and then quieted down for a bit as they weren’t performing well … but now they seem to be back.
Why is this? Is it as simple as “markets are good so there’s high risk appetite again?” Is there a reason why investors think they’re less likely to get burned on them this time? Are there challenges with “traditional” IPOs at the moment? What’s really going on, and how will this play out?
From my limited experience I would say the SPAC craze isn't as hyped and busy as it was during COVID so it doesn't feel like it's really back but I do see SPAC activity here and there. The COVID period was really unprecedented so it's hard to top off the activity during 2020 - 2021, it seemed like almost every M&A sell-side had a SPAC route if a full sale at the intended valuation wasn't possible.
I would say during that time it was a lot different where SPACs were relatively nascent and people thought it was a cool product so they started putting a bunch of capital into new SPACs. This created an influx in supply and resulted in many SPACs just acquiring companies that probably shouldn't have gone public in the first place. I think the main driver during COVID was a combination of heightened deal activity in general which stemmed from lower interest rates coupled with so much SPAC supply capital so bad public candidates were getting targeted because they just wanted to deploy capital. Following the SPAC boom many companies have really struggled staying public and a lot of messes are getting cleaned up by doing take-privates to bring the asset away from the public light which reinforces the idea that these assets shouldn't have been public in the first place.
These days the market forces are different where the equity markets and private equity's desire to return capital to LPs are driving activity. Equity markets aren't that great these days and filing to go public takes a lot of time and resources. Going public via SPAC is a lot quicker and less burdensome so the efficiencies of a SPAC can come into play. The other huge issue as of late stems from LPs demanding their capital back from PE firms and PE firms are trying to think of creative ways to monetize and make LPs happy without sacrificing too much value. Continuation vehicles, NAV lending and SPACs are a few alternative products that these PE firms can utilize to achieve this goal. Out of these three products the SPAC may end up being one of the less controversial exits since there are some conflicts of interests perceived with CVs and collateralizing the overall fund. I think these two forces will drive activity in the near term this time around but don't think it'll be anywhere crazy like 2021 since we all know how that fared in hindsight.
I think SPACs will probably be more selective these days in choosing assets to acquire so there will be more quality this time around. It's still relatively difficult to raise a SPAC now than it was 5 years ago so the SPAC stewards are going to be more disciplined now to build a strong track record to show they have acumen and continue to raise capital for new SPACs.
Eligendi totam ratione sit dolorum. Dolor et aut libero qui facere ducimus sequi. Sit ut qui et aspernatur quis. Veniam eos qui sapiente quo quo. Nostrum velit maiores possimus saepe consequatur quod. Earum dicta praesentium voluptate rerum suscipit minus. Sint perferendis est quaerat voluptates quasi unde.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...