Special-purpose acquisition companies, or SPACs, are having a big moment recently.
Led by some of 2020’s buzziest new stocks, a stampede of SPAC initial public offerings has hit the U.S. market over the past six weeks.
You may have heard of them referred to as “blank check” companies, SPAC’s raise money from investors in an IPO, then use the proceeds to acquire a business, typically within two years.
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Some of the bigger examples in recent days would be the electric and fuel-cell startup Nikola (ticker: NKLA), the online sports betting site DraftKings (DKNG), and spaceflight company which everyone has by now heard of Virgin Galactic Holdings (SPCE) which all went public by merging with SPACs, forgoing a traditional IPO. As a result they have all since inspired cult followings, with their stocks multiplying several times over. It isn’t a blind following as in all cases the companies are strong and very exciting in what they are delivering.
Not every SPAC can boast that kind of success though so homework still naturally needs to be done. But it’s clearly a model that has won acceptance from investors around the world.
$13.6 billion was raised last year alone through 59 SPAC IPOs. And that is nothing compared to what is expected to be a new record in 2020, even as the traditional IPO market has been slow to revive. This year, 32 SPACs have already gone public, raising $10.4 billion—nearly half of all IPO dollars generated in 2020—according to SPACInsider, a website devoted to research and data about the industry. Nine more SPACs are on deck to list soon. That $13.6 billion record will get smashed very shortly so worth sitting up and taking notice.
As a result, at least 96 SPACs are searching for acquisition targets, with a combined $25 billion in their trusts, per SPACInsider. Because special-purpose acquisition companies tend to do transactions with a market value of three or four times their trust, as much as $100 billion worth of companies could go public in the next two years, just from existing SPACs.
There are good reasons to pay attention. A growing proportion of new SPACs are coming from experienced issuers that can attract better deals, more fundamentals-focused investors, and high-quality management teams. And that is the key to all of this and where you should be looking. Experience!
Take Virgin Galactic. Although well below its frothy February high of over $37, at a recent $15.30, the space-tourism venture’s stock is still more than 50% above its precombination value. (By convention, a SPAC goes public at $10 per unit—a common share and a fraction of a warrant, generally exercisable at $11.50.)
Virgin Galactic’s chairman, Chamath Palihapitiya—an early executive at Facebook (FB) who founded the Social Capital venture-capital fund—is back for more. In late April, while the traditional IPO market was shuttered, he raised two additional SPACs: Social Capital Hedosophia Holdings II (IPOB), with $414 million in IPO proceeds to seek technology investments in the U.S., and Social Capital Hedosophia Holdings III (IPOC), which raised $828 million to target tech companies abroad.
Other prominent SPAC sponsors have returned to the market this year. IPOs in 2020 from serial sponsors include those of B. Riley Principal Merger II (BMRG), CC Neuberger Principal Holdings (PCPL), Churchill Capital III (CCXX), and Chardan Healthcare Acquisition 2 (CHAQ).
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The record number of SPACs looking for targets could mean more competition for deals. But there is evidence that the universe of companies willing to sell to a SPAC is greater now than ever before.
Although not as well-publicized as Nikola or DraftKings, other combinations have been successful. I recommended buying shares of SPAC that merged with Vivint Smart Home (VVNT) before its transaction closed in January. The shares ran up to $28 before investors got a dose of reality. But at a recent $17.40, they are still up more than 60% since January!
Vertiv Holdings (VRT), a digital-infrastructure company, recently traded at $14, up about 30% since its deal was announced in December. Its sponsor, Goldman Sachs Group (GS), has filed to raise a new SPAC: GS Acquisition Holdings II.
A bet on a SPAC is a bit of a speculative leap. It’s best to stick with reputable and experienced sponsors and management teams—and not to expect every SPAC to trade like Nikola or Virgin Galactic.
The risks are limited, however. The cash raised in an IPO goes into a trust, where it earns interest until a target company is acquired. If investors don’t like the deal, they can redeem their common stock for a share of the cash in the trust.
Special-purpose acquisition companies give investors a chance to get on the ground floor of a new stock, with daily liquidity and a guaranteed redemption value.
So if you are looking for something a bit different from the ground up, a SPAC is where you should be looking.
As always, get in touch if you need a wealth management assistance from Vietnam’s leading wealth manager. Lawrence.young@holbornassets.com.
By Lawrence Young | The opinions expressed here are his own.
Lawrence Young works for Holborn Group, he is now based in Vietnam office. His areas of expertise lie in personal, lump sum or regular monthly premium tax free savings structures, global investment property, higher education fee planning, inheritance tax issues, frozen and open pension planning through ROPS or SIPP’s, life and general insurance, will writing services and offshore company formation and banking.