2020: A Historic Year for SPACs
The year 2020 has certainly been one for the history books. From tragic natural disasters to a global pandemic to racial injustice protests, this year isn’t one many will soon forget.
Interestingly, though, the Wall Street history books will likely tell a different tale. Yes, the market’s devasting crash in March, which was ignited by the coronavirus pandemic, and its subsequent surge back to all-time highs in less than six months will be covered in-depth. But the reality is that 2020 will more likely be known for and dubbed as “The Year of the SPAC.”
What exactly is a SPAC?
A SPAC, or a Special Purpose Acquisition Company (SPAC), is a tool that investors—institutional and individual—utilize to take a company public. It’s an alternative to the traditional IPO, and it’s grown in popularity in recent years. In fact, according to MarketWatch, 82 SPACs went public in 2020, raising a stunning $31 billion.[1]
Simply put, SPACs raise money in an IPO and then use these funds to acquire a business to bring it public. SPACs are often referred to as “blank check companies,” as the acquisition target is not revealed during the IPO process. Once the IPO is complete, the funds are placed in a trust, and typically, the funds must be used to complete an acquisition within two years. If a deal is not made during this time frame, the IPO is liquidated, and money is returned to investors.[2]
Essentially, SPACs are a “back door” that enable smaller companies to more quickly become public.
Now, there’s much debate whether SPACs offer better returns than traditional IPOs. Take one of the most widely publicized SPACs from 2020, as an example: Nikola Corporation (NKLA).
Nikola is an automobile company that develops electric vehicles, as well as the components, drivetrains, energy storage systems and infrastructure for these vehicles. Nikola has widely touted its Badger pickup truck, even claiming that it will beat Ford’s (F) widely popular F-150 model. Given that the Nikola Badger isn’t expected to be in production until 2022, it remains to be seen if the company can back up this claim and break the F-150’s 43-year run as the best-selling pickup truck in America.
In the meantime, Nikola entered the stock market through a SPAC, VectoIQ, back in early June. Nikola’s debut on Wall Street was incredibly successful, as the stock surged more than 135% in only five trading days. Unfortunately, Nikola’s climb to the top was short-lived.
Even with a strategic partnership with General Motors (GM) announced in early September, Nikola shares have plummeted. NKLA is now trading well below the stock’s initial price when the SPAC was complete in June.
Nikola isn’t alone.
Virgin Galactic Holdings, Inc. (SPCE) is an aerospace company aimed at bringing space travel to everyone. In October 2019, Virgin Galactic entered the stock market through a merger with a SPAC, Social Capital Hedosophia. The stock more than tripled in the following four months before falling back down to earth. The stock is now up about 55% from its initial merger price.
Clearly, there are risks and not every SPAC will be successful. But that hasn’t deterred investors.
According to MarketWatch, the overall IPO market has been red-hot in 2020. There has been a total of 111 IPOs this year, which raised $37 billion. Another 45 IPOs are in the pipeline and 65 have confidentially applied for an IPO. If all of these deals are completed, it would eclipse 2014 when there were 275 deals.
If you’ve considered investing in a SPAC or an IPO and are uncertain if it would help you meet your investment goals, reach out to me today. I’d love to discuss whether SPACs or IPOs are good investment options for you.
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[1] https://www.marketwatch.com/story/2020-is-the-year-of-the-spac-yet-traditional-ipos-offer-better-returns-report-finds-2020-09-04
[2] https://www.investopedia.com/terms/s/spac.asp