The Rise of SPACs: Are They Still a Viable Funding Alternative?

Special Purpose Acquisition Companies (SPACs) swept the financial community in 2020 and 2021, opening a new route to public markets for firms looking for alternatives to conventional IPOs. But following their sudden rise and subsequent fall, most investors and business executives are wondering: Are SPACs still a viable funding option in the current market?

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The SPAC Boom: A Brief History

SPACs, also referred to as “blank check companies,” are formed with one goal: to go public via an IPO and subsequently merge with an already established private firm, in essence taking it public. This reverse-merger strategy became more popular than ever before during the pandemic, with over 600 SPAC IPOs between 2020 and 2021, raising over $160 billion.

What caused this boom? A number of factors came together:

• Low interest rates spawned a quest for better returns
• Efficient regulatory procedures vis-a-vis legacy IPOs
• Lower market risk of volatility for target firms
• Celebrity-endorsed sponsors attracting mainstream support

The Inevitable Correction

By June 2021, the SPAC market sharply cooled. De-SPAC deals (in which SPACs merge with target firms) often under-performed, as many traded under their $10 NAV (Net Asset Value). Regulators subjected them to rising scrutiny, while investor interest also cooled.

This was not entirely unexpected. Any form of financial innovation that expands too rapidly usually goes through a correction phase. Does this correction mark the demise of SPACs, or rather a coming of age of the market?

Where SPACs Stand Today?

The present state of SPACs reflects both challenges and opportunities.

Challenges:

• Greater SEC scrutiny and disclosure requirements
• More discerning PIPE (Private Investment in Public Equity) investors
• Greater redemption rates as investors remain cautious
• Squeezed timelines to identify targets with many SPACs near expiry

Opportunities:

• Less unrealistic valuations making more successful long-term potential
• Experienced sponsors with demonstrated success profiles at the forefront
• Target businesses with improved public market readiness
• Unconventional structures developing to focus sponsor and investor interests

The Future for SPACs

For SPACs to survive, the market is transforming in a number of significant respects.

• Quality over quantity: SPACs that succeed today have sponsors with operational and industry experience, rather than merely financial relationships
• Realistic valuations: Sky-high targets and dubious growth rates are being replaced by more modest, realistic goals
• Better alignment: New SPAC models increasingly link sponsor pay to performance after the merger, rather than merely deal execution
• Targeted approach: SPACs with a focus on specific industries where they have knowledge and relationships are performing better

The Investor’s View

If you’re thinking about SPAC investments, ask yourself:

• Who are the sponsors, and what experience do they have
• Does the SPAC target a sector with solid fundamentals
• How are sponsor incentives aligned with long-term performance
• What is the PIPE investor quality and level of commitment

Are SPACs Still Viable?

The straightforward answer is yes—but with caveats. SPACs remain a valid choice compared to standard IPOs for firms in certain industries or having certain situations. Nevertheless, the success bar has become higher with increased scrutiny both from investors and regulators.