How hot are SPACs on Wall Street? They're so hot that they’ve outpaced the number of IPOs thus far in 2020.
What’s a SPAC? It’s an acronym for special purpose acquisition companies, or what’s sometimes referred to as “blank check” companies.
Unlike traditional publicly listed companies, SPACs operate with the sole purpose of raising capital through an initial public offering to acquire other businesses. SPACs aren't allowed to have existing business operations or earnings, and the money they raise via their own IPO must be used for an acquisition within two years or they are forced to return the money to shareholders.
Although SPAC IPO offering sizes have averaged nearly $399 million, some firms have raised substantially more capital. For instance, Bill Ackman, via Pershing Square Tontine Holdings, raised a record $4 billion in July, making it the largest SPAC IPO to date.
This year’s notable SPAC acquisitions include e-truck maker Nikola; Virgin Galactic, an aerospace company; and DraftKings, an online gambling platform.
According to SPACInsider, 64 SPACs have raised $25.5 billion this year. Meanwhile, there have been less than 50 IPOs. It’s an impressive feat, because it’s almost double all of the money raised by SPACs in 2019.
A proposed ETF called the Defiance NextGen SPAC IPO ETF (SPAK) plans to track the U.S. SPAC marketplace, according to a new SEC filing. The fund will hold 80% of its exposure to IPO offerings derived from SPACs, with the remaining 20% allocated to IPO companies. The underlying benchmark, the Indxx SPAC & NextGen IPO Index, is rebalanced annually and U.S. companies must have a minimum market size of $250 million for inclusion. SPAK’s expense ratio is still unknown.
SPAK’s sponsor, Defiance, is a New York City-based thematic ETF company which currently manages around $484 million in its lineup of three ETFs: the First 5G ETF (FIVG), Quantum ETF (QTUM) and Junior Biotech ETF (IBBJ).
SPACs were introduced in the 1990s, and were used as an alternative to IPOs. But as IPO activity boomed in the late 1990s, the popularity of SPACs waned. When the global financial crisis hit in the late 2000s, SPACs suffered liquidity problems and steep losses. Since then, “SPACs have improved their structural and procedural standards to benefit and better protect investors,” said Joe Mizzoni, investment manager of alternative investment strategies at Aberdeen Standard Investments.
Today, SPACs are viewed as a less grueling and faster way for private companies to tap public markets. While an IPO listing can take four to six months or even longer, being acquired by a SPAC can be completed in a single quarter. As a result, the ability to become a publicly traded company via a SPAC acquisition is a major selling point for companies with their eye on quickly becoming publicly traded.