SPAC Bubble or Not: How to Assess Value and Opportunity

By Brandon Mavleos, Sr. Director, Product Marketing

The recipe for SPACs in 2020 mixed celebrity-backed blank checks with a bull market flush with capital and homebound investors hungry for growth returns. With over 248 SPAC IPOs, last year’s activity was almost twice as high as the previous three years combined. And in 2021, we have already seen more SPAC IPOs than all of last year combined.

These are the elements of a SPAC bubble, says Datasite Managing Director Dan Hostetter. But while there are some marginal players and those without experience jumping into the fray, there has never been such a large number of high quality sponsors in the space.

Just over half of viewers polled during a 2021 Datasite Corporate Buyers webinar believed SPACs are a “fad” - yet a PE Exit Trends webinar last month found that over 73% of those sellers would consider it a viable exit option. The same audience predicts SPACs will be one of the most common exit vehicles for PE-owned companies this year. 

SPACs, the Whither and Wherefore

The SPAC, or Special Purpose Acquisition Company, was once called the “poor man’s private equity.” In simple terms, a pool of capital seeking investment returns wouldn’t seem to attract froth per se. The entity trades as a whole-cloth structure backed by a sponsor and a deal team that has 24 months to identify and merge with a target.

Proponents celebrate the freedom to source up-and-coming companies with attractive growth prospects and a speedier path to public markets than the traditional IPO. The three stages - initial IPO of the empty shell; PIPE capital raise once a target is identified; and merger with the target company - allow retail investors chasing the Robinhood effect to back a deal team before a target company has been identified, much like private equity.

Sellers eager to participate in the buoyant capital market find “speed and certainty” in the SPAC structure, according to Jones Lang LaSalle’s Head of Corporate Development Christina Ungaro, on Datasite’s Corporate Buyers webinar. This can create a tradeoff where sellers leave some money on the table, but it is worth their while to unlock public trading in their shares.

Growth companies with stellar prospects can more easily market their story, and investors can participate in earlier stage companies than would typically go public in a traditional IPO. Retail investors play an important role in SPACs, and investors can exert some control over the deal by voting it up or down when a target is announced.

Whose Returns?

Sponsors have thus far won the best returns, with minimal downside risk, good economics and a lot of upside through warrants. Sellers face a “little more complicated” calculus, but enjoy “the tutelage of a sponsor” in return for potentially higher costs, said Ungaro - though some say the cost of capital is similar to private equity. Companies that don’t need tutelage may skip the structure, as Airbnb did when it spurned the many SPACs courting it and went public on its own.

The return dynamics may be changing, with a large number of sponsored vehicles competing for a finite number of quality companies, and sellers will have more bargaining power in the future. Past vintages, when the structure occupied a marginal corner of the market, are less like current deals, many of which are highly successful for sponsors and investors, notes Datasite Chief Revenue Officer Mark Williams.

DraftKings announced its SPAC deal in December 2019 and closed the deal five months later. It is one of the top performing deals with an 821% return according to SPAC Analytics -- no wonder others want to follow suit. 

What Goes up Must Come Down

SPAC used to be a “four letter word,” said NASDAQ Senior Vice President McCooey on the PE Exit Trends webinar, but now it has “democratized the market.” It ultimately increases optionality all around: “We think having multiple alternatives to come to the market is something that should be embraced.”

The mushrooming number of them could prove to be both a blessing and a curse, as increasingly, respected names are joining on as chairmen or board members and high quality companies are choosing to sell to SPACs, said Autodesk VP Robert McIntosh during the Corporate Buyer’s webinar. “Ultimately we need to see who actually gets the returns on these, and whether or not it’s just the initial private equity funds that are sponsoring these,” he said. Datasite’s Hostetter has confidence in the sophisticated teams that are seeking targets in a specific industry they know well.

What happens to the bubble “is more of a future looking question,” says Datasite’s Williams. The optimistic landscape will stratify into clear successes like DraftKings, as well as high profile SPACs that don’t find a target and have to return the capital to investors minus fees. A sponsor team may overreach on a questionable deal. Teams without experience or a well-focused mandate may raise some red flags.

Red flags and all, SPACs have moved squarely into the spotlight in a bull market and caught the eye of investors who will seem to buy anything. Participants ruminate on the bubble, but bubbles are more complicated than a simple pop that topples all fortunes at once. The question is not, to SPAC or not to SPAC, but how to find quality - and it is there if you have the tools to search it out.