2021 was a bumper year for SPACs and IPOs, with global listings reaching $172 billion and $602 billion, respectively.
But what made investors choose one over the other? In this article, SPAC/IPO process management platform DealRoom compares SPACs to IPOs and delves a little further into the SPAC phenomenon, which has gripped public markets for the last five years.
The team behind the SPAC – usually senior management from a particular industry – seeks out funding, but with a catch: They can’t tell investors what company they’re going to invest in, as according to SPAC regulation, they’re not allowed to know.
This catch – where investors know who but not what they’re investing in – is a SPAC risk, but not a risk that experienced investors will be unfamiliar with. For example, private equity managers rarely know what they’re going to invest in when fundraising with investors.
Rather, they have a set of criteria (industry, size of the company, return profiles, etc.) that they know they’ll be searching for that assuage the fears of the investors about the risks inherent in handing over their funds.
Why are SPACs so popular?
There are a number of theories as to why SPACs have become so popular.
First, SPACs are considered a more convenient way to access the capital provided by public markets than IPOs.
Second, the boom has led to an array of intermediaries offering SPAC services that didn’t exist 20 years ago.
And third, the fact that there are so many SPACs creates a kind of momentum in itself: Managers and investors both consider it an option that they wouldn’t have before.
To understand these trends in greater detail, we put together this helpful comparison.
Below, we contrast and compare some of the features of SPACs and IPOs.
It’s often erroneously stated that going public with a SPAC takes 2-3 months. This is the time that it takes to list a shell company. However, the management team then takes up to two years to find a company to invest in. The investors face a waiting game to know what company will be acquired and when within the two-year limit. If a company isn’t acquired or merged within a two-year period, the funds are returned to investors.
An IPO takes between 12 and 18 months and usually involves an intermediary such as an investment bank that acts as an underwriter for the deal. The lead-up to the IPO is a series of meetings with investors (IPO roadshow) where they commit to acquiring a certain amount of shares at an agreed price and several meetings with the regulators (SEC). The IPO goes ahead at an agreed date, with the market’s reaction on the day usually being taken as a portent of the company’s long-term valuation.
Pros of Going Public via SPACs
Advocates of the SPAC route to going public tend to promote the following benefits:
- Cost – SPACs are invariably a much cheaper route to a public listing than IPOs.
- Valuation – Investors know approximately what share of the publicly listed company they’ll have, whereas with an IPO, that depends on how much the value fluctuates on the opening day.
- Speed – Assuming the team behind the SPAC can make the acquisition or merger, the speed of SPACs can be much faster than that of IPOs.
- Less regulatory burden – There is far less paperwork involved with SPACs than with IPOs – where mountains of paperwork are one of the reasons the process then takes up to 18 months.
Cons of going public via SPACs
Critics of the SPAC route to going public tend to cite the following drawbacks:
- Lack of transparency – With SPACs, the investor has no idea what company they’re investing in, and as such, no idea about what cash flows, opportunities, or marketing potential of the business their money will be used to acquire.
- Conflicts of interest – When investors give money to managers to acquire a company, they’re potentially exposing themselves to significant conflicts of interest. What if the manager acquires a company that a family member owns? Or overpays for a company to suit his or her interests rather than those of the investors?
- Compressed timeline – The fact that managers need to acquire or merge with a company within 24 months or face up to returning investors’ funds forces them to make decisions that they might not otherwise make.
Examples of a SPAC that went public
In July 2021, electric vehicle maker Lucid announced a merger with a SPAC Churchill Capital Corp. IV to list on NASDAQ.
This effectively means that the management team behind the Churchill Capital Corp. looked at companies to acquire or merge with and chose Lucid, valuing the deal at slightly over $12.2 billion.
In the initial period after the listing, Lucid’s shares soared to nearly $60 but subsequently trended downwards and are currently trading at around a third of that, giving the company a market capitalization of around $33 billion – a still extremely respectable return on the investors’ initial investment, within just a year of the acquisition.
Example of an IPO that went public
Rivian offers an interesting comparison to Lucid, as it too is an electric vehicle manufacturer, but it chose to go public through the IPO route.
Its IPO was bound to be a success, given that its investors include none other than Amazon and the Ford MotorCompany: An easy sell to new inventors on the IPO roadshow.
Rivian first went public in November of 2021, with a valuation of $66.5 billion. It raised slightly under $12 billion through the sale of stock at the IPO. However, since the IPO, its shares have consistently trended downward, even an impressive sales pipeline (end customer: Amazon) not being enough to convince shareholders. At the time of writing, its market cap is $27.2 billion.
Putting it all together
On the surface, the cases of Lucid and Rivian appear to show that SPACs offer a fast way to make money, while IPOs are a bureaucratic nightmare that ends up burning through investor cash. But the examples were chosen because they were two of the highest-profile transactions in 2021, and both were conveniently from the same industry.
The truth is that neither IPOs nor SPACs guarantee strong investor returns.
Whichever route to market a company takes, the same fundamentals to generating value still apply.
And of course, it should surprise nobody that the best SPAC processes are those that undertake a thorough due diligence process of the company being acquired by the SPAC vehicle.