A SPAC, also known as a shell company, is an entity that has no commercial operations but was instead formed to raise capital through an IPO for the purpose of acquiring or merging with an existing company. SPACs are publicly traded companies that in the United States are registered with the Securities and Exchange Commission. Members of the general public can buy shares of a SPAC before it completes a merger or acquisition. After the transaction is approved and the business combination is complete, the company’s ticker symbol automatically changes from the SPAC’s symbol to that of the new company. The process is commonly called “de-SPACing.”
Globally, SPAC IPO volume surged in 2020–21 when 83 percent of the 1,026 SPAC listings from 2015 to 2021 took place (Exhibit 1). Another 262 SPACs were in the pipeline (yet to be listed). As their numbers grew, the total capital raised by SPACs soared from $3.9 billion in 2015 to $161.5 billion in 2021. The average capital raised per SPAC has exceeded $200 million every year since 2016 with a peak of $327 million in 2020.
Along with the number of new SPACs, de-SPACing activity also increased in 2020–21. Of the 1,026 SPACs, 321 (about 30 percent) have de-SPACed by completing an acquisition of a target with about 80 percent of the de-SPACs occurring during the past 2 years (Exhibit 2). The total includes about 90 percent of pre-2020 SPACs, about 50 percent of 2020 SPACs, and 5 percent of 2021 SPACs. The largest sectors for de-SPACing volume were industrials, health care, and IT.
SPACs in 2021 were closing at a much faster rate than in the previous 4 years. On average, SPAC sponsors took 13 months to identify and acquire targets in 2021 versus about 20 months from 2017–20. The targets acquired in 2021 were riskier as the average EBITDA margin of de-SPACing targets at time of deal closing was -7 percent compared with 4 percent EBITDA margin for SPACs overall from 2016 to 2021. In 2020 and 2021, more than half of de-SPACed deals had a negative EBITDA margin.
While fast deal closures enabled rapid growth in SPAC volumes and deal sizes, returns following de-SPACing have been below par. Only 23 percent of the target companies ended the 2016–21 period trading above their original share price of $10 (Exhibit 3). Even at year-end 2019, the peak year for number of deals above $10 per share, less than half of SPACs (43 percent) were trading at that level. SPACs have underperformed conventional IPOs by some measures, including the change in stock price from the original offering price.
For the target companies, SPACs offer a faster and less expensive way to become public than a conventional IPO does. Whether these advantages will eventually lead to a performance advantage is yet to be seen. In addition, SPACs in the pipeline will likely have a harder time raising IPO capital than in the last 2 years largely because of the poor returns most SPACs have experienced. For SPAC deals to show improved returns in the future, the SPAC sponsors should focus on the target company’s potential to achieve its plans and improve its performance after the business combination is complete. Sponsors and institutional investors should consider adopting an engaged-investor-operator model and leverage their operating experience and expertise in the industry while partnering with the company’s management team to drive such transformation change.