Special Purpose Acquisition Companies (SPACs)

SPECIAL PURPOSE ACQUISITION COMPANIES (SPACs)

Written by Katlego Maremane, Investment Analyst at RISE

Special Purpose Acquisition Companies (SPACs) have become a popular way to list stocks in the US since Covid-19. Some of the main industries include cannabis, electric vehicles, space travel, online gambling, and healthcare.

In the US, an introduction of stimulus packages from the government resulted in an increase in investment into the equity markets, including SPAC Initial Public Offerings.

The below chart shows the tremendous growth in SPAC Initial Public Offerings from just 1 listing in 2009, to 613 in 2021. The total capital raised was $145 Billion according to Nasdaq data. This contrasts with only 35 issuances in Europe in 2021.

Source: spacdata.com

Below we see that investments in SPACS do not have a good track record, even the most famous SPACS have not created value to investors, with only a few outperformers.

NASDAQ Economic Research reports that roughly a quarter of SPACs gain more than 100% in the beginning, with half of SPACs recording losses against the first day share price of the new company.

According to study supported by PWC and conducted by Michael Klausner (Stanford University), Michael Ohlrogge (NYU) and Emily Ruan (Stanford University) at the end of 2020, they found that that while SPACs with high-quality management teams do better than others, SPAC investors see their post-merger share prices lose by a third or more (on average).

The chart below shows the performance of five of the most popular SPAC listings in 2019/2020.

Chart Source: Infront

Conclusion

As new SPAC issuances grow in the US, it’s a question of sustainability. One could speculate that several SPACS will be dissolved due to lack of target companies.

With new listings on the JSE declining, and the idea still new, SPACs have the potential to become the new popular investment for South African investors.

In addition, with industry disruptors such as EasyEquities providing an environment where everyone can invest, this can also provide a new stream of inflows into the IPOs through ordinary retail investors.

Disclaimer:

This article is intended as a general guide and should not be construed as legal or other professional advice. No responsibility can be taken for any mistakes or omissions, as well as any loss or damage resulting from the use of this material. For precise and thorough legal advice, always consult your legal advisor. Errors and omissions are not included (E&OE)