SPACs Are Getting Larger

By: SPAC Research


Published: June 22, 2020

The wild ride in SPACs continued last week, with almost half of all pending SPAC deals trading at more than 120% of cash in trust. It’s undoubtedly connected to the retail interest that we’ve been writing about lately. But this week we wanted to zoom out a bit and focus on SPAC issuance more broadly.

Nineteen SPAC IPOs have priced so far in Q2 2020, resulting in 31 SPACs this year that have raised over $10.3bn. With ten more deals looking to raise $1.8bn in the pipeline, we’ll be within striking distance of last year’s record $13.6bn haul by mid-July. The first half of 2020 is the largest ever in terms of SPAC issuance.

It’s not just that more SPACs are coming to market. The size of the average SPAC IPO has increased dramatically, from $217mm in the second half of 2019 to $323mm in 2020 so far. And of the 36 SPAC IPOs to put more than $400mm in trust since 2015, 10 of them have come so far in 2020.

Returns on the SPAC asset class have been fantastic on a risk-adjusted basis for the past five years and it’s worth updating some previous studies we’ve done on historical front-end returns to SPAC IPO buyers.

As with our previous analytical approach to assessing front-end returns, we’re assuming a simple quantitative strategy of buying $10 units at IPO, redeeming for cash in trust at liquidation or closing of a business combination (unless common shares are trading above cash in trust), and selling any remaining components on the day the deal closes. The numbers below do not reflect any performance after closing of a business combination. SPACs that are still active are marked to present value of components. We’ve weighted the returns by both capital raised at IPO and by amount of time between IPO and deal closing (for e.g. a 20% IRR achieved over two years is worth twice as much as if it were achieved over just one year).

Past performance is not necessarily indicative of future results

The numbers are impressive, with the largest SPACs providing the highest overall returns. Recent deal closings like Diamond Eagle (now DraftKings) and GS Acquisition Holdings (now Vertiv) provided massive returns to any IPO buyers that held all the way through deal closing.

The $100-$249mm category has also been boosted lately by the performance of VectoIQ Acquisition (now Nikola), ChaSerg Technology (now Grid Dynamics), Health Sciences (now Immunovant) and still-pending deals like Forum II (Tattooed Chef) and Opes Acquisition (BurgerFi).

Restricting the sample to SPACs with closed deals reveals even better returns.

Past performance is not necessarily indicative of future results

There’s some selection bias here. Obviously any SPAC that has closed its deal already has warrants that provided some value to the warrantholder. But it’s striking to see that capital invested in SPACs bigger than $400mm that have closed a business combination (or liquidated) has earned a 16.7% annualized return since 2015.

However, as we’ve chronicled over the past few weeks, SPAC securities have traded up even in advance of deal announcement. You can see that the SPAC Research Warrant Index — which only covers SPACs without a definitive business combination agreement — is at an all-time high as of Friday 6/19/2020.

This means that much of the return to IPO buyers has been pulled forward and could be realized by selling into the open market at current prices. It also means buyers at today’s prices are often taking significant principal risk and could lose a material portion of their investment between now and a SPAC’s eventual deal approval meeting.

So what happens next?

We’re not going to speculate on the outcome of all the outstanding SPAC business combinationsBut on the front end, more issuance is coming, and quickly. Rumor has it that there could be as many as 20 more new SPACs on file by the end of July.

If you sort our component prices page by liquidation deadline, you’ll see an incredible number of Q2 SPAC IPOs whose units are trading at least 4-5% above where their IPO priced. And Social Capital II and III are both trading comfortably over $11!

Leaving aside the question of whether warrant coverage for some deals will creep back down below 1/3, there’s clearly demand for SPAC IPOs from high quality sponsors. After a pause in March and April, institutional investors are back to allocating enthusiastically to SPAC IPOs, driven by continued expectations of returns that materially outperform both short-term Treasurys and those investors’ cost of capital. And while there are plenty of examples of smaller SPACs performing well, the market is clearly expressing a preference for larger deals (and repeat sponsors).

It’s also worth pointing out that SPAC IPOs are no longer just a yield instrument. Fundamental investors are showing up more frequently in IPO order books. And the fact that sponsors are seeing an investor base that’s actually interested in their deal roadshow will ultimately be supportive of quality transactions across the entire spectrum.

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