Not All SPACs are Born Equal: A Review of the Developing Landscape

The SPAC Landscape

A SPAC is a shell company created with the express intent of merging with or acquiring an existing private company, with the ultimate goal of taking the combined entity public.

While the concept of SPACs has existed for several decades, they have seen a resurgence in popularity as a means for companies to go public more swiftly and with reduced regulatory oversight compared to traditional Initial Public Offerings (IPOs). However, it is important to note that not all SPACs are equal in terms of performance.

In recent years, there have been instances where SPACs have been perceived as a disappointment in terms of investment, with many experiencing a significant decline in value after listing due to over-estimated revenue projections and valuations. This has prompted the Securities and Exchange Commission (SEC) to take action, as regulators seek to address concerns regarding the quality and transparency of such investments.

SPACs – Not All Bad

It is crucial to acknowledge that not all SPACs should be viewed in a negative light. Some SPACs have been candid about their potential and have presented realistic revenue projections and valuations that offer considerable upside for investors. These SPACs have the potential to succeed in the capital markets and may provide investors with the opportunity to participate in the growth of promising private companies.

One of the main factors that have contributed to the struggles of some SPACs is the use of overstated revenue projections and valuations. A significant number of SPACs have been accused of utilizing overly optimistic revenue projections to attract investors, which leads to a significant decrease in value after listing when these projections are not met. This has caused a lack of trust in the SPAC market, as investors have become cautious about investing in companies that may not accurately represent their financial prospects.

Another challenge faced by some SPACs is a lack of transparency. Some SPACs have been criticized for not providing adequate information about the companies they plan to merge with or acquire. This lack of transparency can make it challenging for investors to make informed decisions about whether to invest in a particular SPAC.

However, it is important to note that not all SPACs have these issues. Some SPACs have been transparent about their plans and have provided reasonable revenue projections and valuations. These SPACs may offer investors the opportunity to participate in the growth of promising private companies, as they provide a more efficient and less regulated path for these companies to go public.

It is crucial for investors to conduct thorough research and evaluate the prospects of any SPAC they are considering investing in. This includes reviewing the revenue projections and valuations provided by the SPAC, as well as any available information about the company it plans to merge with or acquire. Investors should also consider the track record and experience of the management team behind the SPAC, as well as any potential risks or uncertainties that may impact the company’s future growth.

Every SPAC is Different

While some SPACs have struggled due to over-inflated revenue projections and valuations, as well as a lack of transparency, others have provided reasonable revenue projections and valuations with plenty of upside for investors. It is important for investors to carefully research and evaluate the prospects of any SPAC they are considering investing in, in order to make informed decisions about whether to invest in these types of companies.

According to data from Dealogic, SPACs have demonstrated mixed performance over the past two years. In 2020, a record $83 billion was raised through initial public offerings (IPOs) by SPACs, several of which subsequently completed acquisitions and went public. However, the performance of these SPACs has been mixed, with some experiencing significant declines in value after listing due to inflated revenue projections and valuations.

Overall, the performance of SPACs has been underwhelming over the past two years. According to data from Renaissance Capital, the average return for SPACs in 2020 was -15.6%, while the average return for SPACs in 2021 was -14.2%. These returns are notably lower than the overall market, which has experienced strong gains in recent years.

SPACs Should be Judged on Their Merits

In recent years, there have been instances of SPACs experiencing difficulties as a result of overestimated revenue projections and valuations. One notable example is Nikola Corporation, a producer of electric and hydrogen-powered vehicles, which went public via a merger with a SPAC in June 2020. However, its shares subsequently declined following the revelation of inflated technological capabilities and potential legal issues.

Another example is DraftKings, a fantasy sports and online gambling company that went public through a merger with SPAC in April 2020. Initially, the company saw strong gains after going public, but its shares have subsequently decreased due to concerns about its financial prospects and increasing competition in the online gambling market.

Conversely, there have been instances of successful SPACs in recent years. Virgin Galactic, a space tourism company that went public through a merger with a SPAC in October 2019, is one such example. The company has seen robust gains since going public, and has garnered significant interest from investors due to its unique business model and strong growth prospects.

HUB Security, a company that is going through a merger with Mount Rainier (NASDAQ:RNER), is set to start trading on February 2023 at nearly 50% of its circa $3 billion fair market value according to some analysts’ comparable companies benchmark. This represents one of the rare cases in which a company’s management has seemingly decided to leave a healthy upside for investors that are coming in at the traditional $10 per share entry level.

Palantir Technologies, a data analytics and software company that went public through a merger with a SPAC in September 2020, is another example of a successful SPAC. The company has seen strong gains since going public, and has been successful in attracting and retaining large enterprise customers.

It is essential to note that the performance of any specific SPAC will be contingent upon the particular circumstances of the company and the industry in which it operates. Investors should conduct thorough research and evaluate the prospects of any SPAC they are considering investing in, in order to make informed decisions about whether to invest in these types of companies.