Deal Making in 2020 Was All About the SPAC
“I think the SPAC business has become a large and sustainable ecosystem,” said Michael Klein, the veteran banker who has since launched a number of SPACs that have made multi-billion dollar acquisitions, including the healthcare provider MultiPlan and the analytics software company Clarivate.
Some financiers have since made it their business to increase SPAC after SPAC. Mr. Klein recently raised $ 450 million for his fifth Churchill Capital fund. Venture capitalist Chamath Palihapitiya, who brought Virgin Galactic to the public, has raised a number of funds in search of acquisition targets.
And deal makers expect the SPAC craze, so far largely an American phenomenon, to go global. Earlier this month, French billionaire Xavier Niel raised € 300 million ($ 368 million) for a blank check fund, making it the biggest market debut in France this year.
What could go wrong?
Popular targets of SPAC deals this year have been electric vehicle manufacturers, some of which have stumbled heavily since going public. Goldman Sachs strategists noted earlier this week that many post-merger SPACs had poor returns compared to the S&P 500 this year. “If poor returns persist, investors’ appetite for new SPACs may wane,” they write, suggesting that new funds may become more difficult to attract. The short seller Carson Block has declared SPACs the “big money heist 2020”.
The popularity of SPACs could also reverse itself, advisers warned. Goldman strategists estimate that there are currently 193 blank check funds looking for acquisition targets of $ 63 billion. This implies a potential purchasing power of around 300 billion US dollars, as the typical SPAC, according to LUMA Partners, merges with a company five times its size thanks to external investors participating in the transaction.
SPACs typically have two years to find an acquisition target, or they are contractually required to return their money to investors. This puts them on the clock, potentially pushing each other out of business, or leading to mergers that arise out of urgency rather than cleverness. “A business model that encourages promoters to do something – anything – with other people’s money at times inevitably leads to significant destruction,” Block wrote.
And one of the big drivers of its surge in popularity earlier this year, its disappointing IPO performance, may be fading. The huge surge in Airbnb and DoorDash ratings on their recent IPOs could move some companies back to more traditional IPOs, leaving SPACs with billions of dollars but fewer targets worth buying.