The Evolving Landscape of SPACs

Each week brings renewed attention to special purpose acquisition companies (SPACs), entities designed to raise capital through initial public offerings (IPOs) with the specific intention of acquiring a private company and facilitating its public listing. However, a growing number of industry observers are questioning the trajectory of this trend: Is the current surge merely an early phase, with further participation still to come? Have we already reached the peak of activity, despite continued momentum? Or are early warning signs appearing, suggesting a potential downturn?

Recent SPAC Formations

Current market activity suggests a period of robust growth. Today, B Capital, a venture capital firm co-founded by Eduardo Saverin of Facebook, filed plans to secure $300 million through a SPAC. Similarly, Mike Cagney, the fintech entrepreneur behind SoFI and Figure, successfully raised $250 million for his own SPAC venture. Even Michael Dell is participating, with his family office registering plans to raise a $500 million blank-check company this afternoon.

Renaissance Capital reports that a total of 16 blank-check companies garnered $3.4 billion in funding this week. The influx of new filings into the IPO pipeline continues, with 45 SPACs submitting initial documentation this week, a significant increase compared to the 10 traditional IPO filings received.

Growing Concerns and Potential Risks

This rapid expansion is prompting concerns, as evidenced by headlines like one recently published in Yahoo News, questioning the potential for losses among SPAC investors. Ivana Naumovska, an assistant professor at INSEAD, explores these concerns in a recent Harvard Business Review article titled “The SPAC Bubble Is About to Burst.”

Naumovska’s research indicates that as a practice gains wider adoption, awareness and perceived legitimacy increase. However, for potentially contentious practices – and SPACs are often viewed as such – increased usage also fuels outsider skepticism and concern. This dynamic contributes to the emergence of cautionary headlines.

Historical Parallels and Media Influence

Naumovska draws parallels to earlier reverse mergers, which experienced a similar surge in the mid-2000s, peaking in 2010 before a sharp decline in 2011. Her research team collected extensive data on reverse mergers and market reactions, including media coverage. Analysis of 267 articles published between 2001 and 2012 revealed only six positive articles, 148 neutral assessments, and 113 negative reports.

Negative media coverage intensified as transactions involving companies with lower reputations became more frequent. This media scrutiny attracted regulatory attention, and a feedback loop between investors, regulators, and the media ultimately led to a significant slowdown in activity.

Current Media Sentiment and SPAC Timelines

Currently, most media coverage of SPACs remains largely neutral. While some business reporters harbor private reservations, they are generally withholding judgment, largely because, with a few notable exceptions – such as the fraud allegations against electric truck startup Nikola – there is limited concrete evidence for criticism at this stage.

Evaluating many recently formed SPACs is premature, as they have up to two years from their fundraising date to identify and acquire a target company, or return the IPO proceeds.

The Appeal of SPACs and Private Market Dynamics

The core argument supporting SPAC formation – that numerous “unicorn” companies are poised for public trading – holds weight, particularly given the substantial growth within the private market.

Mixed Performance of Existing SPAC Deals

Despite predictions of unraveling, some merger deals have proven resilient. Virgin Galactic, the space tourism company that initiated the SPAC boom in late 2019, continues to perform well. Founded by Sir Richard Branson in 2004 to offer suborbital spaceflights, its shares have more than doubled since January, despite recent delays in flight testing. The company is currently valued at $12 billion, despite reporting minimal revenue last year.

However, other deals have faced challenges. Clover Health, a health insurance company that went public via a SPAC sponsored by Chamath Palihapitiya, is reportedly confronting “a confluence of existential threats” to its business, according to a Forbes investigation.

The company is under scrutiny from the Department of Justice, the Securities and Exchange Commission, and the short-seller Hindenburg Research, which has accused Clover of making misleading statements. (Clover has disputed these allegations, but Forbes notes it is still facing at least three class-action lawsuits related to its IPO disclosures.)

Skepticism from Industry Veterans

Veteran venture capitalist Steve Jurvetson expressed skepticism about the SPAC frenzy, stating that while some legitimate companies are utilizing this route to go public, many are “early-stage venture companies” that avoid the stringent forecasting requirements typically imposed on traditional IPOs. He suggests that SPAC sponsors are actively seeking companies lacking established operating histories, allowing for potentially inflated projections. He characterized this as the fundamental basis of the current trend.

While others may share Jurvetson’s concerns, they are often hesitant to express them publicly, as many venture capitalists would welcome the opportunity to take their portfolio companies public through any available means, including SPACs.

Differing Perspectives on SPAC Sustainability

Ed Sim of Boldstart Ventures in New York is among the few VCs who have publicly stated their firm has no immediate plans to raise a SPAC. “I have zero interest in that honestly,” Sim stated, adding with a laugh, “You can come back to me if you see my name or Boldstart affiliated with a SPAC two years from now.”

Kevin Mayer, former Disney executive and briefly CEO of TikTok, argues that the decline in the number of publicly traded companies creates a need for alternative routes to public listing. He acknowledges the proliferation of SPACs but believes that “the wheat will be separated from the chaff very, very soon.”

Emerging Data and Future Outlook

Recent data is beginning to paint a less optimistic picture. Bloomberg Law’s analysis of companies that went public through SPAC mergers since January 1, 2019, revealed that 14 out of 24 experienced a decline in value within one month of the merger’s completion. Furthermore, one-third of these companies have seen a year-to-date depreciation in value.

The number of securities lawsuits filed by SPAC stockholders following mergers is also increasing.

Given the current rate of SPAC formation, the question of long-term sustainability is gaining prominence. Professor Naumovska believes she already has an answer.