Record Issuance and Venture Capital Deal Flow
Eighty SPACs raised more than $32bn in Q3 2020, an eye-popping number that was nearly four times the amount of issuance in Q2, the previous quarterly record.
Lots of well-regarded sponsors raised SPACs and many deals traded materially above trust on announcement which supported the price of shares and warrants without an announced transaction. All of which brought many new investors into the product for the first time.
At quarter’s end there was more than $60bn in SPAC trust accounts, and over sixty SPACs in the IPO pipeline looking to raise more than $17bn. For context, the pipeline of SPACs on file to IPO right now is approximately the same size as the entire investible SPAC universe was at the beginning of 2019.
Meanwhile, the trend we explored in July of generalist SPACs dominating the market has continued. Half of all capital raised by SPACs this year has gone to teams without a specific focus. And sector specialists outside TMT and consumer represent a rapidly shrinking slice of the overall pie.
Much of the generalist capital has gone to mega-SPACs. SPACs sponsored by Bill Ackman, Michael Klein, Bill Foley and Chinh Chu have collectively raised over $11bn this year, meaning just four sponsor groups — all without a specific sector focus — have done more than 20% of the year’s total fundraising. Also of note: nine SPACs (categorized above as either General or Energy) with a focus on sustainability, renewables, or something else within the ESG spectrum, have raised $2.6bn this year.
We also saw 35 deals announced in Q3 worth over $73bn in the aggregate, (as measured by enterprise value of the target, based off of a $10 share price). We’ve explored the size of the target universe before, but the chart below adds some perspective.
We’ve previously written about the correlation between enterprise value and stock performance for SPAC deals. So it’s no surprise that sponsors are shooting for bigger targets in general. Below, you’ll find one more look at the most recent quarter in context. Part of the SPAC story right now is access to venture capital-style deal flow. In a world with zero interest rates and low GDP growth, investors have been exuberant about companies with large expected revenue growth rates. But with large revenue growth comes valuation on a revenue multiple and a high degree of sensitivity to hitting revenue estimates. You can see below that 23 of this quarter’s 35 deals were either pre-profitability or pre-revenue.
Hopefully the current crop of SPAC targets is able to deliver on expectations. Venture capital is known for being willing to accept a high failure rate at the fund level, as long as it can lock in a few tremendously successful outcomes. But venture investments typically start at much lower valuations and it’s much more challenging to earn a 100x outcome if a company’s starting valuation is $1bn. Given that public market investors can’t afford to have 50% of their portfolio go to zero, they should be watching this phenomenon carefully.