The IPO Market Ex-Lyft Has Been Dominated by SPAC Deals in 2019
It would be easy to focus purely on Lyft this year, as the $2.3 billion deal overshadowed other IPOs. But after questionable fundamentals contributed to a weak performance in Lyft’s initial days of trading, investors should look more closely at another corner of the market: Special Purpose Acquisition Companies, or SPACs.
SPACs have been around since the 1990s, but recently gained serious momentum. Excluding Lyft, $5.9 billion in equity has been raised through U.S.-listed IPOs to date in 2019, according to Dealogic.
What may come as a surprise: Some 53{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of that amount was raised for SPACs, which by definition have no immediate plans for the money but to park it in a bank account. Also known as blank-check companies, SPACs raise cash before identifying an acquisition target, then, once a deal is selected, give investors the opportunity to stick with it or get their money back.
What’s driving SPACs forward? Part of the answer lies in SPACs successfully finding deals that win shareholder support. In 2018, a record $22 billion in acquisitions were completed by SPACs, up from $13 billion the year before, Dealogic says. Those were new peak years that topped 2007, when $11 billion in deals were done.
But there are other factors at work behind the success of SPACs, according to bankers who have worked with them through multiple cycles. IPO Edge spoke to Neil Shah, who is Managing Director and Head of Alternative Markets at Citigroup, and has focused on SPACs since 2005.
Citi has ranked at or near the top of the SPAC league table over the last several years, with several deals trading well: Capitol Acquisition Corp. II, which acquired Lindblad Expeditions in 2015, trades at $15.45 vs. $10.00 at IPO; Capitol Acquisition Corp. III, which acquired Cision in 2017, trades at $13.97 vs. $10.00 at IPO; and most recently, Churchill Capital Corp, which raised $690 million last year and recently announced the acquisition of analytics firm Clarivate, trades at $13.50 vs. $10.00 at IPO, even though the deal hasn’t formally been approved yet.
Mr. Shah acknowledges that non-SPAC IPOs faced an unusual challenge earlier this year. “Part of the problem for IPOs is that there was a dearth of new IPO regular way issuance in the quarter, partially due to the SEC shutdown,” he said in an interview. “But a large number of SPAC IPOs could still get done during that time.”
He pointed out that over the years, the market has been able to watch the same players return, raise SPAC money and succeed, building track records. One such individual is Martin Franklin, who alone has several SPACs under his belt.
“On the glass half full side, we definitely have better sponsors, but also more data points and more sophistication,” Mr. Shah says. “The glass half empty view is that the opportunity set is still fairly narrow. You need a high-quality target company for a deal to succeed. There is a bifurcation of some that have that and some that don’t. It’s buyer beware, buyer be careful.”
One recent phenomenon that may have drawn higher-quality companies into the mix: Private-equity firms selling part of their stakes to SPACs but remaining significant shareholders. Onex and Baring Private Equity Asia, the owners of Clarivate, aren’t selling any shares in the proposed deal and will own a majority stake after the transaction.
The decision by a private equity owner to keep its stake can help in multiple ways. First, it sends a signal that the private-equity owner still sees upside in a company as a listed stock. And private-equity firms tend to remain actively involved, with experienced executives remaining on a company’s board. That ensures a level of corporate governance that might not be in place with an outright sale.
“All of the major private equity firms are evaluating it as an option,” Mr. Shah says, adding that a variety of would-be private sellers or traditional IPO candidates are looking at SPACs. “There’s been a record number of client calls coming in, asking ‘should I be considering a SPAC as an option?’”
Mr. Shah is more confident in a record amount of acquisitions by SPACs than a new peak in fundraising in 2019. Part of his reasoning is that there’s a fair amount of dry powder from SPAC IPOs that needs to be put to work before more cash will be raised.
“We should have a record number of deals in 2019,” he said.
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