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Will SPACS Be Back (With A Bang) In 2021?

Bright spots? In 2020?

There were not many of them, we’ll admit. But there were incandescent pockets here and there, if you were an investor, and specifically if you invested in special purpose acquisition companies (more commonly known as SPACs).

On Wall Street, of course, you need to follow the money to follow what’s in favor. And SPACs, hot in 2020, are, well, still hot.

All told, as estimated by SPACInsider.com, these investment vehicles, across 248 IPOs, raised more than $83 billion, far outpacing other years, where the initial public offering (IPO) size only reached double digits and where, for example, 2019 saw 59 IPOs and gross proceeds of $13.6 billion.

Thus far in 2021, as of this writing, there have been 27 SPAC IPOs, according to the site, which have generated $6.6 billion in gross proceeds.

In only one example noted in this space, as reported this week, tech startup Social Finance (SoFi) is closing a merger deal with blank-check firm Social Capital Hedosophia Holdings Corp. V to file an IPO.

As to where SPACs go from here is anyone’s guess. But the fact that these “go public” options eclipsed “traditional” initial public offerings (at 194 deals and $67 billion, as estimated by Renaissance Capital and cited by CNBC) speaks volumes to the allure of raising cash and making deals, opportunistically. Investing in SPACs also requires a fair amount of trust in the management teams behind the dealmaking.

In terms of what they do and how they do it, SPACs exist as shell companies that go public, with full cash coffers, and then look to merge or acquire a private company and take it public. There is usually a two-year “horizon” (our term) for a deal to get done; if no merger is in the works, or the investors are nonplussed by the proposed deal, the SPAC can be liquidated and holders can redeem their shares (the initial distribution of SPAC shares, typically, is $10 a share). The SPAC may not have an announced target yet, and the hunt goes on until the SPAC finds a target company (and during the deal may take only a stake in that entity, not the whole firm).

Eyeing The Returns — And The Challenges Ahead

A Wall Street Journal article this week noted that of SPACs that completed deals during the period that spanned January 2019 and June 2020, the average loss was about 12 percent within six months of the deal announcement, compared to a 30 percent gain in the tech-heavy NASDAQ.

Olympia McNerney, Goldman Sachs’ head of U.S. SPACs, said in an interview with Bloomberg, “The SPAC is bringing the last round of financing forward to the same time as the IPO. Companies are effectively doing the last round and the IPO all in one go.”

One notable difference tied to the search for investor funds: The news outlet noted that in a blank check deal, would-be targets can offer up their “forward looking” numbers — namely, how they think top and bottom lines will fare in the future, and this is not a staple of traditional IPOs and their roadshows. We note that can stoke enthusiasm, and capital commitments (i.e., investments) based on what might ultimately, overly-optimistic projections.

In addition, the shell companies, with capital in hand, are effectively competing for the same universe of private companies for these deals, which means that valuations, and purchase prices can climb, raising the bar for returns on investment. Add that to the fact that interest rates are likely to rise off of (current) lows, the hurdle becomes even more onerous. Caveat emptor, then, as 2021 comes into focus.

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