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Sydnee Gatewood
Sydnee Gatewood
Articles (3160) 

Baron Capital Commentary: Attack of the SPACs

By David Goldsmith, Assistant Portfolio Manager

November 19, 2020 | About:

The advantages – and potential pitfalls – of this newly popular alternative to the traditional IPO.

SPACs (special purpose acquisition companies or "blank check" companies) are blind pools of capital designed to take private companies public without going through the traditional IPO process.

SPACs hit the headlines with the highly successful public offering of online gaming and fantasy sports company DraftKings Inc. (NASDAQ:DKNG) in April. Since then, SPACs have exploded in popularity. There has been more money raised in SPAC IPOs in the past two years than in the prior 16 years combined. More than 40% of 2020's IPOs by volume have been SPACs.

The convergence of two trends is driving the surge. The long-running boom in private equity and venture capital has resulted in a crop of private companies that their investors are now looking to cash in on. The extreme market volatility at the onset of the COVID-19 pandemic in March accelerated interest in SPACs, which can provide greater confidence than a traditional IPO that a deal can be made at a given valuation without being subject to the vagaries of a volatile market. The fast-track nature of SPACs, which do not involve the time- and resource-consuming regulatory requirements and roadshows of the traditional IPO process, is also appealing in an environment rife with macro uncertainties.

The quality and attractiveness of the SPAC pool has also improved. Although they have been around for decades, until a few years ago, SPACs were more of a curiosity in which modest amounts of money were raised to buy small companies and the sponsor economics resulted in significant dilution. Now, prominent and respected sponsors with highly reputable management teams and investment firms are raising large pools of money, acquiring high-quality businesses, and offering investors palatable terms.

SPACs are not without risks. Once a deal is finalized, the share price can fall below the deal price as easily as any other stock. Case in point: Nikola Corporation (NKLA), an electric vehicle company that went public in June through a SPAC for about $34 per share and is now trading at $18 per share amid allegations of fraud and the resignation of its founder. The ever-increasing number of SPACs is resulting in lower-quality sponsors without the same breath of experience and skills needed to find and acquire high-quality companies.

Continue reading here.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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