SPACs party like it’s 2020
The enthusiasm for blank check companies continues in 2021, and Morningstar Pitchbook finds that EVs and Mobility Tech could benefit.
Mentioned: Collaborative Investment Series Trust (SPCX), Listed Funds Trust (), PayPal Holdings Inc (PYPL), Tesla Inc (TSLA)
It’s 2021, but as far as special purpose acquisition companies (SPACs) are concerned, the party of 2020 never stopped.
According to spacinsider.com, in 2020 there were close to 250 SPACs raised over US$83 billion, with an average size of US$ 334 million. So far this year, the count is already at 75 – so why all the excitement for SPACs?
Serial SPAC’er Chamath Palihapitiya invested in two companies going public via a SPAC in one day. This is on top of the six blank-check vehicles he helped raise in 2020.
Why 2020?
The sustained volatility and the distinct price declines earlier in 2020 made IPOs and direct listings impractical options for the majority of private companies, which is where SPACs have found an opportunity.
“Unlike SPACs, direct listings do not allow private companies to raise any new capital during their transition to the public markets, which presents a problem for many start-ups, given the elongated economic ambiguity driven by the pandemic,” explains Morningstar Pitchbook analyst Cameron Stanfill.
Essentially, he describes SPACs as large “boxes of money, that necessitates a much lower level of diligence than a similarly sized IPO of an operating entity, since there are no financial statements to scrutinise.”
Now that traditional IPOs are relatively fewer, investors have flocked to SPACs, in the hope of hitting upon the next Tesla (TSLA), or PayPal (PYPL). With this increased demand, existing sponsors have raised higher amounts.
And if you want more diversification and easy trading of your SPACs, don’t worry – there’s an ETF (or three) for that!
New SPAC ETFs
In the first month of the new year, Created by Morgan Creek Capital Management and Exos Financial launched 2021’s first SPAC exchange-traded fund, and the third SPAC ETF overall.
The Morgan Creek-Exos SPAC Originated ETF (SPXZ) follows the first-ever SPAC ETF, Defiance’s Next-Gen SPAC Derived ETF – ticker SPAK – and the first-ever active SPAC ETF SPAC and New Issue ETF (SPCX), both of which launched in the last quarter of 2020, and both of which are up over 15 per cent.
SPAK’s portfolio holds mostly established companies that have gone public via SPAC. SPCX holds shares of SPACs looking for companies to bankroll. With SPXZ, you get a mix of both.
What are SPACs?
A ‘Special Purpose Acquisition Company’ is a company with no real business operations. It exists only to raise capital via an initial public offering, or an IPO, and to then use that capital to buy existing private companies.
“This atypical pathway to the public markets was once a niche strategy for small investment firms," as Morningstar Pitchbook analyst Cameron Stanfill explains.
These companies own and manage nothing except the cash that they raise. Because of this, they are called ‘Blank-Cheque Companies.’ They are generally formed by investors, also called sponsors. Sponsors usually have experience and expertise in a particular sector, and it is assumed that the acquisition targets will be companies in that sector. Many sponsors are seasoned private equity investors.
"These early embracers saw SPACs as a way to extract fees from adding structure to a reverse merger," notes Stanfill. "The strategy has now become the hottest financial topic of 2020 after a massive uptick in the volume of these blank-check vehicles and as the stature of the investment professionals involved legitimised the space.”
How do they work?
“At first, the SPAC follows the traditional IPO process registering with the SEC, filing prospectuses and running investor roadshows," explains Stanfill, "This entity then prices the IPO and raises the funds that will subsequently be deployed to acquire the target business. At this point, the SPAC is a publicly-traded shell company and has assumed much of the cost and time commitments usually borne by the target company.”
Once the SPAC raises capital, it usually has two years to complete a deal. If it does not, it faces liquidation. The capital is placed in a trust account, which earns interest at market rates.
Meanwhile, these publicly-traded companies don't have to identify the companies that they want to acquire. Put another way, if you buy into a SPAC, you will have no idea which company you might end up owning. You don’t even know IF you will end up owning an acquired company.
The concept of a SPAC itself can be boiled down to a pre-sold IPO for the private company that it acquires – without many of the stringent requirements, checks and balances that go into a traditional listing.
SPACs and EVs
In 2020, 26 mobility tech companies merged with SPACs (or are in the process of doing so), representing a combined valuation of over $100 billion and generating an average return of 63.8 per cent since their announcement dates, according to Morningstar PitchBook data.
The blank-check activity is being powered by public investor demand, the capital needs of these R&D-heavy startups, and broad tailwinds for electrification. Arguably, there has never been a better time for makers of unprofitable and often unproven technologies to go public. "Investors are willing to pay up for almost anything in the EV supply chain," said Morningstar senior equity analyst Seth Goldstein.
In a recent report titled, ‘The EV/Mobility SPAC Handbook’ Morningstar Pitchbook analysts Asad Hussain and Zane Carmean point out that the strength of recent mobility SPAC listings indicates high investor enthusiasm for transportation technology, such as electric vehicles, and demonstrates that mobility startups may be able to raise more capital in the public markets than they could as private entities.
“In the latter half of the year, our Mobility SPAC Index generated a return of 77.7 per cent, well above the S&P 500 total return and Nasdaq 100 total return of 22.2 per cent and 27.4 per cent, respectively,” the report says. The Morningstar US TME Index returned 18.64 per cent.
Areas of interest that the authors uncover in the space include the electric vehicle sector, electric charging infrastructure and next-generation battery technology, autonomous driving, lidar technology, micromobility services and the emerging electric air taxi industry.
Should you buy a SPAC?
As always, we guide caution.
First, You do not know in advance the acquisition target you’re taking a bet on the founder of the SPAC. Retail investors rarely have insight into the minds of founders, and can only make bets based on public perception. This is a risk.
Second, even if the founder has a target in mind, the SPAC might not be able to close the deal. If this is the case, and you get your money back a few years after the initial investment, that is an opportunity cost. An opportunity cost is what you lose in gains you could have potentially made, had you not invested in the SPAC.
Third, as Stanfill’s note on fees to investment banks shows, there’s a lot of people making a lot of money from SPACs – and those people don't seem to be retail investors.
Fourth, the success of the SPAC depends on the success of the company it acquires. As established, the research, due diligence and checks behind these acquisitions may not be as stringent as it would have been in the case of a traditional IPO, or public company acquisition. It again seems like the investor is the loser.
So before you invest in a SPAC, ask yourself who is making the money, on what, and if you have alternatives you could consider. And as always, invest based on your financial goals, risk appetite and time horizon. When in doubt, seek a financial adviser.