Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA, made a guest appearance on CNBC's Closing Bell on April 27, 2023 to share her views onread more
What’s Your Special Purpose?
April 22, 2021
From 1996 to 2018, the number of publicly listed companies in the United States fell by more than 45%. This stunning statistic is the result of ongoing mergers and acquisitions, plus the vast amounts of capital available to private companies and the perceived regulatory hurdles associated with going public. Not since the “Nifty Fifty” in the 1970s have we had such a concentrated group of publicly traded companies, and that’s not necessarily a good thing for investors—or for consumers for that matter. But thanks to the re-emergence of SPACs, an acronym for Special Purpose Acquisition Companies, that trend may now be reversing.
SPACs are colloquially referred to as “blank check” companies because investors who buy into their shares do not know what their investment will ultimately become. Often vilified in the press as a sign of market exuberance—and occasionally tarnished by the presence of low-quality backers or the distraction of celebrity endorsements—these structures nonetheless exist with the single goal of streamlining the process of taking a private company public without all of the time, expense, and regulatory oversight required by the traditional public offering process.
Originally a back-water financial structure first developed in the 1990s, SPACs this go-around hold a completely different connotation as a disruptive innovation whose time has come. Last year alone, a record 248 SPACs listed compared to just 209 traditional initial public offerings (IPOs). And that trend only accelerated into early 2021, with SPAC issuance accounting for about 70% of all newly public companies in the first quarter, according to Dealogic. Sports-betting firm Draft-Kings, space-tourism company Virgin Galactic, personal genomics company 23&Me, as well as a host of other private companies have all utilized this financial structure.
Traditional IPOs still clearly have their benefits, including greater visibility and prestige, but they can be costly and time intensive. An IPO can take two to three years to close, whereas a SPAC can be completed in as little as two to three months. Additionally, SPACs have to make fewer disclosures, can provide forward guidance once they announce their acquisition target, and set their own deal valuation as opposed to an initial public offering process where the offering price can change dramatically based on the strength of the investment bank’s book-building process.
To be sure, not all SPAC deals will be successful—and “streamlined processes” is also a euphemism for less protection and less transparency for individual investors, which has rightfully prompted increased scrutiny from regulators. Additionally, the economics for insiders can be substantial and associated fees are typically greater than those collected by investment banks for traditional initial public offerings. But investors have the option of redeeming their shares at the SPACs offering price if they do not like their acquisition target and they can also benefit from the pairing of warrants with their shares, which can provide an extra “kicker” to one’s investment returns if the stock rises over time.
While the SPAC structure certainly has its pros and cons, from a big picture perspective, they are increasingly the vehicle of choice for private companies seeking a sophisticated response to the structural issues of going public—and that is potentially a positive development for the markets overall. Only time will tell if they serve this special purpose, but this go around, SPAC may not be the four-letter word that today’s headlines suggest.
Source: World Bank
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