SPACs: What Are They, and Are They a Risk to the Market?
Special purpose acquisition companies (SPACs)—also known as blank-check companies—have gained immense popularity among investors since the beginning of 2020, despite being around for decades. Offering an alternative way for companies to go public, SPACs themselves are publicly traded investment vehicles whose purpose is to bring target companies public through the process of a merger. SPACs are incredibly complex vehicles and can differ widely in size, structure, and quality, among other things.
SPACs’ goal: A faster path to public markets
The traditional initial public offering (IPO) process can be quite arduous from both a funding and regulatory perspective. Companies intending to go public embark on a long process to gain investors’ interest and investments, as well as clear regulatory hurdles. In general, SPACs aim to alleviate some of those burdens by promoting a faster and less expensive path to the public markets. The creation of the SPAC starts with a sponsor—ranging from a private equity firm to a former corporate executive—who works with an underwriter to bring the company public. After the SPAC goes public, investors are able to buy and sell shares as they would with any other public equity.
Typically, SPACs then have two years to find a company with which to merge. If a target is not found, the SPAC liquidates and distributes funds back to shareholders, and the sponsor loses its investment.
SPACs’ popularity has exploded
As mentioned, SPACs are not new phenomena and have existed for decades, yet their popularity has exploded in recent years. As you can see in the chart below, total SPAC value has climbed exponentially on a monthly basis over the past year. February 2021 alone saw more than $50 billion in deal value, with value in the first quarter of 2021 exceeding the amount seen in all of 2020. Air continues to be let out, though, evidenced by the marked decline in volume since February.
SPAC value growth was relatively modest until 2020
Source: Charles Schwab, Bloomberg, as of 8/27/2021.
The chart below shows that the number of SPACs has also seen a spike in growth. Almost 180 SPACs were announced in February 2021; again, the number of companies launched in the first quarter of 2021 exceeded the total seen in all of 2020. Yet, similar to the aforementioned decline in value, the number of new deals has fallen sharply.