What happened to all the SPACs?

A look at the past, present and future of special purpose acquisition companies

By Sarah Werner

If you were a consumer of business news in 2020 and 2021, it was hard to go too long without reading about the significant rise in SPACs, or special purpose acquisition companies. Today, that flood has slowed to a trickle. Here’s a quick look back at the past, an assessment of the present and a peek into the future of this IPO vehicle.

The past

SPACs have been around since the 90s and are essentially big pools of cash listed on an exchange. Their purpose is to find a private company, buy it and take it public quickly. Some on Wall Street call them “blank-check companies’’ because the investors backing the SPAC put up their money months before an acquisition target is identified, trusting the people running the show to find a good deal.

The shares of these companies are issued at a nominal $10/share to shareholders. There is no incentive for a shareholder to own a SPAC share since there are no assets on the book besides the cash raised. The shareholder is betting on the optionality of the SPAC to find a deal that is worth more than the nominal value - essentially an arbitrage play.

In 2020 and 2021, many shareholders found that the hype behind a deal was enough to create an arbitrage opportunity and oftentimes bought into shares at much higher than the nominal value, creating a bit of a frenzy to raise a deal. Typically a company has 2 years to secure a deal and shareholders have several opportunities to pull back their funds. This can put a constraint on what kind of deals the SPAC can reasonably afford to fund.

In a counterparty to all this, there is the target acquisition company. This company may or may not have a traditional path to an IPO and many private investors look to SPACs as a liquidation event for an investment that may be giving a negative return to date. Historically, these companies were often left for dead by traditional IPO markets, but 2018-2020 saw some successful deals, triggering an entire boom cycle of funds.

To put things in perspective, 2019 to 2020 showed a 462% year-over-year jump in proceeds raised by SPACs. In 2021 this trend continued with IPOs (including SPACs) enjoying a record year with 2,340 new issues raising $428.9B. (by volume, IPO activity rose 73% compared to 2020.)