The mania for blank-check companies that took off in 2020 has exploded in 2021, with 133 SPACs raising around $40 billion on the US stock markets as of Wednesday – and celebrities like Colin Kaepernick getting in on the new Wall Street craze.
It took until early October in 2020 for the 133-SPAC mark to be reached, according to data from investment firm Accelerate, giving a sense of the boom in popularity of special purpose acquisition companies. Just shy of 250 SPACs went public in 2020.
A SPAC is an entity that exists solely to list on the stock exchange to raise money, in the hope of finding and merging with a target company to take it public.
The model can be extremely lucrative for the initial sponsors of the SPAC, who take a big stake for a small sum – often 20% for a nominal price of $25,000. For example, Bloomberg reported that Alec Gores turned one $25,000 stake into an $80 million pay out. SPACs also offer the target companies a less costly and demanding way to go public.
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More than 40 SPACs raised upwards of $11 billion in the first 10 days of February alone on the New York Stock Exchange and Nasdaq, according to Accelerate.
There are now close to 400 blank-check companies on the market looking for a target. They have more than $120 billion on their balance sheets, Accelerate said, and there are roughly 100 more in the pipeline.
“February’s been pretty gangbusters,” Julian Klymochko, chief executive of Accelerate, said. Accelerate runs an Arbitrage Fund that provides exposure to SPACs and so tracks the trend closely.
“I didn’t think last month’s record of $23 billion would be beat. But now it’s looking like that’s gonna happen,” he told Insider.
Klymochko said there is huge demand for entities that are able to take early-growth stage companies public.
“Those have not really been available in the market over the past 20 years, because [the companies] tended to stay private for longer and then pursue a traditional IPO when there’s not much growth left.”
He also said the “sponsor-economics… are truly exceptional. A SPAC is the most lucrative financial product, the likes of which we’ve ever seen.”
Quarterback and campaigner Colin Kaepernick added his name to the growing list of SPAC-backers on Tuesday. Basketball player Shaquille O’Neal, former House speaker Paul Ryan, and baseball executive Billy Beane have also got into the market.
Critics also argue that the huge chunk reserved for sponsors – known as “the promote” – squeezes the amount that later investors can make from the deals. And they worry about the lower regulatory standards for target companies looking to go public.
Yet the trend shows no signs of slowing down. Billionaire investor Bill Ackman, who launched the biggest SPAC yet in 2020, told the New York Times that “every friend” is launching one. “It’s like everyone who had an internet company in 2000. It’s like, ‘Oh, yeah, I got one, too.'”
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