During a panel discussion at the Stout Valuation Summit, Jamie Spaman, Managing Director in Stout’s Valuation Advisory Group, led a conversation on the recent popularity of special purpose acquisition companies (SPACs), the differences between traditional IPOs and SPACs, and how SPACs may fare in the market over the long term.
The panelists consisted of the following:
The discussion has been edited for length and clarity.
SPACs have been around for decades, averaging well less than 50 IPOs per year for much of the 2010s. However, in recent years, SPACs have grown significantly in popularity as an investment vehicle. There were only 59 SPAC IPOs in 2019; in 2020, that number grew to 248. And 2021 saw 613 SPAC IPOs.1
Timing and flexibility present themselves as key differences between a traditional IPO and SPAC process. A traditional IPO can take anywhere from nine months to three years, while a SPAC allows for a shortened timeline, in some cases taking as quickly as only three to four months. From a marketing standpoint, SPACs are attractive because companies do not need to go through traditional road shows.
SPACs also present more flexibility with deal terms, unlike traditional IPOs. In contrast, the structure of the deal with a de-SPAC merger can be adjusted to a much greater degree.
SPAC shares are also generally priced at $10 a share, whereas a traditional IPO lacks any certainty regarding the pricing of a share, as share price could decline significantly after an IPO.
Will Pierce does not see a lot of new SPACs launching into the market, and he expects to see a normalization of the number of SPACs looking for targets, largely limited by access to the liquidity needed to consummate some of their transactions.
“A big part of the SPAC market are the PIPE (private investment in public equity) investors who show up with the cash when a deal needs to be consummated, and they seem to have started to retrench a little,” said Pierce. “We saw some huge transactions closing, but what actually gets IPOed at day one of the SPAC is a very different number than the cash needed to close a lot of these transactions. The secondary PIPE that’s required to show up with the money when you want to buy a company is critical to this process, and we’re seeing a lot less appetite in that part of this SPAC process. It’s going to be tough for new SPACs to come to market because they realize that the real cash that’s needed to consummate a transaction doesn’t seem to be as eager as it once was.”
Investors can redeem a SPAC’s public shares, and prior to a merger, those redemption rates can be high – higher than 50% for many deals, and sometimes as high as 90%. Those redemption rates can significantly impact the proceeds needed to finance a transaction.
Will also mentioned that many companies taken through SPACs see an aggressive fall when they issue their first earnings releases, as that is the first time the companies are held to a higher standard in terms of regulatory oversight and reporting as well as earnings.
“There is an information gap between what is talked about during the de-SPAC process versus once the company is actually public,” said Will. “If you look at a lot of the companies that have been taken through SPACs, you’ll see a lot of huge run-ups followed by crashes. Those typically are around the first earnings release, where the companies are held to a higher order of scrutiny than they were during the de-SPAC process.”
Brian Barnthouse explained that it can be challenging to predict the long-term market for SPACs – whether the market will stay at an elevated level or lower to only a couple dozen SPAC IPOs each year. In the past two years, SPACs have had success bringing pre-revenue, very early-stage companies public because the companies are able to tell a growth story and help investors understand the potential for a particular target. However, if there is more regulation around limiting what SPACs can disclose or placing more liability on the SPAC itself, transactions may taper back.
“I think SPACs will be here to stay for at least the foreseeable future, but we’re going to see that activity come back down a little bit,” said Brian. “One reason is performance — about two-thirds of SPACs that have taken a private company public since 2019 have shown a loss in value. There’s about a third that have grown or increased in value, and some of those fairly significantly, which can skew some of those average returns. But when you’re looking at the median results within the last couple years, generally the performance has been negative.”
Back in April, the SEC released a statement that called in question the accounting treatment for the warrants for most SPACs.2 Historically, SPACs have accounted for issued warrants as an equity investment, but the SEC called that analysis into question. This led to a couple hundred SPACs needing to go back, potentially restate their financials, and disclose the warrants as a liability rather than an equity instrument. This stalled the SPAC market but had little impact from a valuation standpoint since the reclassification from equity to liability did not have any significant impact on cash flows and taxes.
However, this did create a significant administrative headache. Public warrants often have a feature that allows a company to call back public warrants if the stock price trades at $18 a share for a certain amount of trading days post-merger, effectively forcing the warrant holder’s hand to exercise. Because of that, a traditional closed form Black-Scholes model could not capture the true value of those warrants. Appraisers and management teams needed to implement a complex Monte Carlo simulation to value the warrants, requiring a significant amount of time and money to revalue the instruments and restate their financials.
SPACs’ popularity has grown significantly in recent years; however, there is uncertainty over how long this will continue. SPACs can offer advantages over a traditional IPO — a shortened timeline and deal flexibility, for example — but SPAC popularity may dwindle given their weak average performance and limited access to transaction liquidity.