Over the past decade, US capital markets have been buffeted by investor concerns around Covid-19, US/China trade talks, the volpocalypse, Presidential elections, and taper tantrums. During that time, SPAC issuance grew from just 1% of all dollars raised in US IPOs in 2012 to 51% of all dollars raised in 2020.
Until a deal is announced, SPACs perform like a 3-month US T-bill plus upside from warrants. When a SPAC deal is announced, the common stock and warrant (both of which are publicly listed and trade separately) begin to price in the attractiveness of the target company’s business discounted by transaction risk. If investors don’t like the proposed transaction, they are free to redeem their original investment plus accrued interest – not only do they keep 100% of their principal but they retain the 5-year warrants (free lunch…cough, cough!) bundled in with the IPO offering. This downside-protected feature of SPACs with uncapped upside makes them a rare species in the 2 & 20 investment management world. Can you imagine the colorful response from a PE fund manager if an LP asked for a full refund?
Additionally, as the SPAC market has matured, it has drawn interest from actively managed funds seeking a source of durable alpha to compete with the Pink Panther-like outperformance of passive ETFs. The combination of structural attractiveness and PE-like alpha has propelled SPACs to pole position. If we treated SPACs like an industry sector, they would figure in the top 3 sectors by IPO volume every year since 2015.
But it is in difficult markets that SPACs truly shine. In the period since the Covid-19 lockdown began, SPACs have been the bright star in the IPO firmament. After a slow start in 2020, SPACs have surged to a substantial share of the IPO market in the last 3 months.
Not only were there more SPAC IPOs during the lockdown but the average size of these SPACs was larger than traditional IPOs. In fact, the average SPAC IPO was bigger than the average traditional IPO for 4 of the last 6 years. SPACs have come long way from an average size of $55 million in 2012 to $327 million in 2020.
While SPACs remain primarily a US-focused product, SPAC investors have not been deterred by the ratcheting up of US/China trade rhetoric or the poor performance of Asia focused SPACs – the number of Asia-focused SPAC IPOs has nearly doubled since 2017 with the involvement of well-regarded investors such as New Frontier Group and CITIC Capital.
The sector focus of SPACs has been far more dispersed than the sector focus of traditional IPOs. In 2019, perennial favorites TMT and healthcare accounted for 69% of traditional IPOs, while only 31% of SPACs focused on these sectors. Meanwhile, consumer-focused SPACs have attracted more interest than traditional consumer IPOs: 24% vs 6% respectively in 2019.
In 2020, nearly half of the SPAC IPOs were generalists with most SPACs choosing not to define a sector strategy upfront – there have been zero SPACs focused on industrials, energy and financials and just 2 consumer SPACs thus far. TMT and Healthcare remain under-represented in 2020 relative to the traditional IPO dominance of these sectors.
Looking forward, we expect that: