The 2021 outlook for the booming SPAC market and conventional IPOs

The 2021 outlook for the booming SPAC market and traditional IPOs

The New York Stock Exchange building is decorated for Christmas on November 30, 2020 in the Financial District of New York City, United States.

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IPOs vs. SPACs: who will win in 2021?

2020 was a surprisingly good year for IPOs, but it was an even better year for Special Purpose Acquisition Companies (SPACs).

Renaissance Capital concluded 194 traditional IPO deals for $ 67 billion, the best year since 2014. But it was an even better year for SPACs, bringing in roughly the same amount: 200 SPACs raised approximately $ 64 billion.

SPACs are non-commercial companies founded solely to raise capital from investors for the purpose of acquiring one or more operating companies. They were a small part of the investment landscape until a few years ago, but their popularity has exploded in recent years.

Who will win in 2021? Market participants say there is room for both.

“When you combine the $ 130 billion IPO and SPAC volume, those numbers exceed anything we’ve seen since the internet bubble,” said Kathleen Smith of Renaissance Capital, who provides IPO research to investors.

The Smith’s ETF, the Renaissance Capital IPO ETF (IPO), a basket of 50 of the largest companies that have gone public in recent years, has been a big beneficiary of interest in going public this year. After years of relative underperformance, the IPO ETF is up 100% this year and has recently hit historic highs. Assets under management now exceed $ 500 million. The return was increased by the pandemic-induced demand for stocks in the digital economy (e.g. Zoom, Pinterest) and biotech stocks (e.g. Moderna), which are typical components of the IPO market.

SPACS on one roll

But SPAC also plays a role and cannot be deterred by earlier criticisms of SPACs in general.

“SPACs bring many benefits to the capital-raising process,” said Gil Ottensoser, head of SPAC Banking and Capital Markets at BTIG, including:

Full transparency. SPACs must file an S-4 when announcing a company they intend to buy that has much of the same disclosure and risk outlines that are included in the S-1 that an IPO must file.

Sponsors with expertise. Bill Ackman, Michael Klein, Chamath Palihapitiya, and private equity firms like Apollo Global, Solamere Capital, and TPG Capital have all recently hit the room, adding credibility to the SPAC company.

Ability to use forward-looking guidance. Since the SPAC is a public company, the SPAC can provide forward-looking guidance to the company when it announces the company it has acquired. “Investors receive even more information about the target company than they would with an IPO,” said Ottensoser.

An easy exit. Investors who are dissatisfied with the intended acquisition can sell their shares before the acquisition is complete.

2021 playbook: more of it

Who will win in 2021? IPOs and SPACs are subject to the same rules when going public: a large part of it depends on market conditions. An upscale market and an improving economy will help both camps.

Smith says there will be many notable unicorns likely to use the IPO route to go public in 2021, including SpaceX (spacecraft), Stripe (mobile payments), Waymo (Alphabet’s autonomous vehicle), and Instacart (grocery delivery) ). .

Their IPO ETF will be one of the first ETFs to include Airbnb and DoorDash when they go public this week.

Paul Dellaquila, who heads Defiance Next Gen’s SPAC ETF (SPAK), a basket of current SPAC offerings, expects the SPAC’s profile to rise only in 2021 with so many big names behind it.

“Nothing is as successful as success,” said Dellaquila. “Up until a few years ago, most SPACs were small-cap, low-profile affairs. Then companies like Virgin Galactic and DraftKings went public on SPACs, which raised the profile significantly.” Both are among the largest SPAK holdings.

Next up, Dellaquila says: sports teams. He says that RedBird Capital (Billy Beane of “Moneyball” is an investor) is trying to bring a sports team to the public, maybe the Fenway Sports Group.

Even staunch IPO advocates like Kathleen Smith say there is room for both IPOs and SPACs. She notes that the SPAC offerings keep a lot of money-losing stocks out of the regular IPO market, resulting in a better quality structure.

Assuming markets hold up and the economy improves, the sheer number of SPACs currently seeking acquisitions (210, according to BTIG, all with a maximum of 18-24 months) implies that 2021 will be at least as strong will be like 2020.