Above: A Hydrogen Powered Truck from Nikola Corporation, Which Is Merging with VectoIQ Acquisition Corp.
Since the coronavirus crisis drove the market to multiyear lows, the flow of initial public offerings has ground to a veritable halt. That is, except, for special purpose acquisition companies, or SPACs.
Some $2.7 billion has been raised through SPAC IPOs since the beginning of April, accounting for a whopping 84% of the U.S. market, according to data from Dealogic. While the overall pace of IPOs has slowed a bit, it would have plummeted without SPACs: The only regular IPOs to close included a handful of small biotech deals as uncertainty plagued the broader market.
For context, SPACs represented $3.7 billion, or 34% of total IPO volume in the first three months of the year. That percentage is roughly consistent with the market share SPACs have commanded over the last couple of years as higher-quality players entered the fray and the product gained institutional recognition, as IPO Edge highlighted last year in a roundtable with Cowen Inc.
Why have SPACs been able to rebound so much faster than regular-way IPOs? The key is that SPACs hold cash in trust, usually for up to 24 months, and any investor has a right to redeem if they don’t want to own the target company a SPAC purchases. That effectively puts a floor on the value of a SPAC – something that is very appealing in an environment so fraught with uncertainty. IPO investors also get warrants attached to the shares they purchase, creating significant upside if a good deal gets done.
There have been specific success stories that likely created momentum for SPACs. Take Chamath Palihapitiya’s third SPAC, Social Capital Hedosophia Holdings Corp. III (ticker: IPOCU). It raised an upsized $720 million as investors bet he can find another target like Virgin Galactic Holdings, Inc., which has soared since going public with his first SPAC. IPOCU, along with IPOBU, Mr. Palihapitiya’s second SPAC, have both traded well above trust value since listing, opening the door for more to follow.
“It’s not surprising considering the flurry of SPACs since the Social Capital pricing,” said Steve Parish, Head of Capital Markets at ICR Capital, which has advised on dozens of SPAC transactions.
There are other signs of strength in the SPAC world that may be supporting new IPOs. VectoIQ Acquisition Corp. (ticker: VTIQ), for example, announced a deal to acquire Nikola Corporation, a maker of battery-electric and hydrogen fuel-cell electric vehicles.
That company, whose name is a riff on inventor Nikola Tesla, has drawn fanfare from investors who see it as the Tesla, Inc. of commercial vehicles. VTIQ units (ticker: VTIQU) have more-than doubled from their IPO price – even before the deal has been completed.
Similarly, sports-betting outfit DraftKings Inc. (ticker: DKNG), which went public through a merger with Diamond Eagle Acquisition Corp., shocked Wall Street by getting the deal done in April when market volatility was at crisis levels. Shares of DraftKings are 135% above the SPAC’s IPO price of $10.
There are structural reasons for SPACs to continue thriving in the current environment. One is that disclosure rules for SPAC deals allow companies to issue long-term forecasts that aren’t allowed for regular-way IPOs. That could be critical given the uncertainty in 2020 and 2021 related to coronavirus issues.
It can be easier to inject large amounts of cash for a company through a SPAC deal. Regular-way IPOs, on the other hand, often have selling shareholders as part of the deal, reducing the amount of money that goes to the company.
Of course, investors shouldn’t expect SPACs to replace regular-way IPOs entirely. For one thing, there are questions about just how much cash can be raised. There are 89 SPACs that have IPO-ed and are currently looking for deals, according to B. Riley FBR’s SPAC Desk, which is separate from the firm’s Research Department. That’s roughly $20 billion in cash waiting to be deployed.
While there is probably room for high-quality SPACs to raise money, some areas, like cannabis, may be approaching saturation. As B. Riley FBR’s SPAC Desk points out, there is over a billion dollars sitting in cannabis-focused SPACs alone.
And investors should take note of a couple of hiccups in the market this week. Sustainable Opportunities Acquisition Corp., which raised $300 million to find and ESG-related target, broke issue by falling below $10 (it remains at $9.90 per unit). Another IPO, GigCapital3, Inc., was seeking $200 million and was pulled outright.
Even so, SPACs whose sponsors have a proven track record will likely continue to succeed raising money. And with the regular IPO window shut, it’s one of the few paths to liquidity for selling companies these days.
When will regular-way IPOs return? Chances are, the market will be very selective. After all, investors are still scarred from the poor performance of many IPOs in 2019 such Lyft, Inc. and Uber Technologies, Inc. while coronavirus worries will linger for some time. “Going forward, the IPOs we’re most likely to see launched in the near term are in businesses that have held up well throughout the crisis,” Mr. Parish said.
John Jannarone, Editor-in-Chief