SPACs have completed IPOs in record numbers in 2020. Given that going public via a business combination with a SPAC has gone mainstream, I think we will continue to see the SPAC as a viable way for good companies to go public in addition to the traditional IPO path. If one were to "follow the money", one can see that this trend is likely to continue for the foreseeable future.
SPAC sponsors, including private equity firms, hedge funds, investment banks and venture capital funds, typically make money on their initial investment as long as the SPAC completes a business combination, almost regardless of how well the stock performs. The investment banks that underwrite the SPAC IPOs and assist on the M&A activities also typically generate a lot of fees from both the IPO and the M&A process. The private companies that are agreeing to enter into business combinations with SPACs are often receiving much better valuations than they had been receiving in the private market, most likely resulting from the glut of SPACs out in the market looking for good private company deals. In what has been a very positive trend for private company targets, we are seeing multiple SPACs “fight” over good companies by offering better terms and more favorable valuations.
Like any hot stock sector, stock performance over time will ultimately determine the fate of the current SPAC wave. In the meantime, we encourage private companies looking to go public to "ride the wave."
The mergers and acquisitions space has been a competitive market for targets for some time, with 2020 activity initially subdued compared to 2019. Now comes a flood of newly public SPACs, loaded with a war chest of dry powder from their initial public offering and a two-year, use-it-or-lose-it ticking clock. Newly public SPACs (those eager to find a target and make a deal) are frequently reacting to the stiff competition for desirable targets by going after earlier stage companies. This competition dovetails nicely with SPACs’ hunt for growth that outpaces the market. If a SPAC’s managers can identify trends and early stage companies that can disrupt markets, they can potentially ride those trends to far greater returns than what would be achievable from safer investment opportunities.
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