The special purpose acquisition company, or SPAC for short, has become 2020’s most talked-about investment vehicle. SPAC IPOs are happening virtually every day.
They’re helping financial superstars such as Bill Ackman raise tremendous amounts of capital. More importantly, these SPACs are completing mergers with target companies in record time.
I recently suggested that the SPACs have become popular because it allows investors to make a bet on the jockey rather than the horse. If Joe Blow raises funds for a SPAC, you’re betting on an unknown commodity. However, if you back Bill Ackman, you’re betting on a man who made $2 billion earlier this year shorting the market at the absolute best time.
The cavalcade of SPACs happening in 2020 might be puzzling at first glance. However, the truth is, people have been betting on the jockey rather than the horse for some time. Only now, it’s become far less discreet.
SPACs are rushing to go public because it’s an efficient way to put institutional capital to work. Long term, I don’t see why SPACs can’t become a regular part of the public markets.
Warren Buffett Does a SPAC
No, the Oracle of Omaha isn’t doing a SPAC. But then again, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), in some respects, is the ultimate SPAC. Sure, institutional investors might rationalize their investment in the holding company by suggesting it is the ownership of Berkshire Hathaway Energy and Burlington Northern that make it a long-term hold. Still, we all know it’s a bet on the legendary investor.
In some respects, getting a clean slate from which to create a new Berkshire Hathaway might be very enticing to the soon-to-be 90-year-old. Were he a few years younger, Buffett could bang out five or six of these every couple of years, and soon he’d have a mini-Berkshire.
Now, I’m overstating the SPAC’s usefulness. In most cases, the SPAC sponsor would retain 20% of the equity in an IPO for 3% to 4% of the IPO proceeds. For example, a sponsor might pay $7 million for $60 million in stock sold through a $250 million IPO.
So, the SPAC structure is probably more attractive to industry executives who aren’t looking to create a permanent vehicle for growth, as Berkshire does, but rather to make lightning-quick acquisitions already run by capable management.
While SPACs have raised approximately $24 billion in 2020, buyout firms such as KKR (NYSE:KKR) have raised almost $102 billion in 2020, a sign that these newfangled investment vehicles have a way to go before they replace traditional private equity.
SPAC IPOs Continue to Gain Momentum
The international law firm, Proskauer, recently released its 2020 SPAC IPO study. The report studied 95 SPACs going public between January 2016 and June 2020. It found that the size of the average SPAC IPO has increased dramatically in 2020.
“The SPAC IPO market has been resurgent in recent years and has continued to accelerate through the summer of 2020. SPACs have gained a foothold as a preferred vehicle for private companies to enter the public markets in these volatile times,” said Daniel Forman, a partner in Proskauer’s Capital Markets Group.
It found that the typical SPAC has an acquisition time frame of 24 months (approximately 56% of the 95 SPACs), followed by 18 months at 27%. The average number of days to complete a business combination is 440 or 14 months.
I recently discussed 10 SPAC IPOs to buy. One of them, not surprisingly, was Pershing Square Tontine Holdings (NYSE:PSTHU), Bill Ackman’s $4 billion capital raise intended to snag a “mature unicorn” that’s still got some growth left.
He looks at the SPAC as an efficient way to put $5 billion in cash to work. That’s why so many are rushing to do SPAC IPOs. It takes far less time than a traditional IPO.
Further, and something that’s not often discussed when talking about SPACs, the fact they provide downside protection in times of uncertainty, while also providing potential upside form an ultimate combination.
“Market participants have been more actively seeking alternative investments and Spacs provide an inherent appeal as a security with principal-protected downside and equity upside,” Chris Tyson, managing director and head of Spac advisory services and M&A at MZ Group told IR Magazine recently.
I would be shocked if 2021 didn’t meet or exceed the numbers in 2020.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.