2020 — Rise of the SPACs

Despite the COVID turmoil SPAC launches have doubled in 2020 and raised 3 times as much capital as 2019

In the last 6 months, there has been a rash of new SPAC announcements in the US. With three months to go in 2020 there have been 128 SPACs filed, up from 59 last year raising $50 billion, 3x more capital than 2019.

A special purpose acquisition company, sometimes called blank-cheque company, is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company utilising the proceeds of the SPAC’s Initial Public Offering.

An entrepreneurial investor/promoter will setup a SPAC with the objective of either acquiring a preidentified company or will go to the market to find a deal.

Similar “cashbox” companies were once a feature on the Australian Stock Exchange (ASX) however in 2015 the ASX effectively killed them in an update to their Listing Rules.

Typically ASX Cashboxes were slightly different to SPACs in that they were often created from reconstructed mining explorer shells known as Reverse Take Overs aka “backdoor listings” vs listing brand new clean shells as in the case of SPACs.

ASX Backdoor listings were considered cheaper, but they were messier and took longer to list, while they still occur they seem to be much less common than in the days of the dotcom boom and early 2000s.

As a VC investor, this sudden rise in SPACs is a very interesting development.

As our portfolio companies mature and become valuable businesses, options arise to exit the companies. Fund 1 is just over 3 years old with an average holding period of about 16 months but already some of the portfolio companies are indicating they are getting early M&A approaches.

Good companies have lots of exit options, typically corporate acquirers will offer cash/shares and in some cases, we may be able to IPO the top performers, however, prior to Q4 2019 the previous 5 years have been very slow for tech IPO’s with many companies pushing out IPOs in favour of massive late-stage funding rounds from big funds such as Softbank or other big groups.

Although easier than an IPO and less distraction for the company, in many ways these later-stage VC deals came with hidden costs, namely favourable terms in the form of multiple liquidity preferences given to the late-round investor, which in many cases forces an IPO deadline and/or in cases where the company does not hit certain valuation multiples in a trade sale the liquidity preference means that the team, staff and early investors may have the value of their 5–10yrs of work and investment crunched down.

Although there is an active market in Venture Secondaries, where later stage investors buy a share of a venture fund providing liquidity to the Fund Investors this is significantly more work, there is a limited pool of suitable secondary investors and not all portfolio companies in a fund at any given time will be at a stage that maximises the outcome for the Investors.

The SPAC with its high public company valuations and relatively lightweight method of listing and reduction in risk from liquidity preferences seems like a comparatively attractive exit option, albeit giving away some of the economics to the promoter.

We are also starting to see VC funds/Partners and Growth Funds arranging SPACs with a view to accelerating the process of exiting their portfolio companies.

There are many potential conflicts of interest in this process especially if arranged by Venture Funds or associates, however, it is interesting to watch it unfold and from our investor’s perspective, we believe it could provide earlier liquidity and higher valuations to Venture Fund investors than the historically more common trade sale.

Whether SPACs turn out to be good investments for new public investors remains to be seen (history suggests mixed results), some will make good returns but as usual, there will be a portion of these floats run by “Promoter/Spivs” aiming to make a quick profit that may not turn out so well.

The sudden SPAC explosion does make you wonder if there are some time bombs being launched but there are some market trends that are hard to ignore.

• The ongoing willingness of central banks and Western governments to pump up equity markets
• The massive influx of “Robin Hood” retail investors,
• The pressure of sitting in cash or bonds with near-zero returns is driving investors to bid up equities (NOLA — No Other Logical Alternative)
• Foreign Investors flocking to the US Markets as a safe haven

Certainly, it appears to us as owners/investors that the shares of high growth-stage companies are worth significantly more in a SPAC than they are as private companies.

Given SPACs provide investors earlier liquidity as well as higher valuation we believe on balance it feels like the SPAC boom will be a strong tailwind for Venture Capital Fund Investors for the foreseeable future.

More on SPACs here

Nasdaq — How to Invest in SPACs

The Simple Way to Invest in the Hottest SPACs

More Spag Bol than SPAC Bowl — The Secret Broker (looking at some of the dodgier deals being launched as SPACs)