The special purpose acquisition company (SPAC) market has boomed over the past several years, with continued increases in IPO activity and record completions of de-SPAC transactions. Since January 1, 2020, 89 de-SPAC transactions have been completed, totaling over $145 billion of transaction enterprise value. An additional 117 announced de-SPAC transactions are pending close, 96 of which have been announced in the first quarter of 2021. There are 433 SPACs actively seeking acquisition targets, representing over $125 billion of IPO proceeds. A number of additional SPACs have filed for IPOs, many of which filed in the first quarter of 2021, demonstrating the explosive growth of the SPAC market.1
Although SPAC IPO activity continued to climb well past record highs, with the number of IPOs during 2020 nearly 4x the 2019 total and the first quarter of 2021 alone eclipsing the previously record setting 2020 totals, the market has begun to see a bit of a cool down. The private investment in public equity (PIPE) market has been slightly less active in recent months as investors have become more disciplined with the due diligence process. SPAC boards have also increased the use of independent fairness opinions as a best practice. Additionally, the U.S. Securities and Exchange Commission (SEC) has increased its scrutiny on SPAC deals, most recently with the change in accounting treatment for SPAC warrants. However, the current slowdown is expected to be short-lived as these developments are ultimately beneficial for SPAC investors, giving them more resources to bolster their trust in the process. Given the current market valuations, potential capital gains tax changes coupled with more traditional financial sponsors and financial firms getting involved, it is reasonable to believe there will be plenty of high-quality, private equity-backed companies and corporate carve-outs to support SPAC momentum for the foreseeable future.
The De-SPAC Deal: Risk vs. Reward
With the abundance of recent activity in both IPOs and de-SPAC transactions, there are a number of factors that make de-SPAC deals relatively easier to complete compared to traditional IPOs. First, investors in the SPAC IPO are backing the SPAC sponsor to find an attractive company to acquire. The SPAC sponsors typically have a successful track record of prior investments (i.e., many SPAC sponsors are private equity managers). Consequently, the SPAC investors tend to show the sponsors some level of trust when asked to approve the de-SPAC deal. Second, there is generally more disclosure for de-SPAC deals relative to traditional IPOs. For many de-SPAC deals, both historical and projected financials are provided to the public, while only historical financials are provided for traditional IPOs. Finally, de-SPAC deals with PIPE investments can provide another remote indication of the value of the target since many of the PIPE investors are not affiliated with the sponsor or the target.
These benefits are not met without some additional risks, however. The SPAC sponsor is subject to reputational risk as it needs to acquire a company and provide a shareholder return, investment risk as it has an equity interest in the SPAC and litigation risk from potential shareholder lawsuits as evidenced by a significant increase in Directors and officers (D&O) insurance premiums for SPAC board members. Additionally, the target company is subject to operational risk as it is expected to execute on its business plan and projections provided to the public, investment risk as target company investors typically roll much of their investment into public shares and litigation risk shared with the SPAC sponsor. A well-managed process with thorough due diligence, use of corporate governance best practices and proper investor transparency should mitigate many of these risks and maximize shareholder returns.
Read our recent SPAC Update for latest market activity, league tables, de-SPAC market performance and Asia Pacific SPAC insights.
1.Data presented from January 1, 2020 through March 31, 2021