SPACs Stage a Comeback

The world of finance has seen many trends come and go, but few generated as much excitement, speculation and eventual scepticism as Special Purpose Acquisition Companies (SPACs). Also known as "blank-check companies," SPACs were a market sensation during the pandemic years, peaking in 2020 and 2021. However, the bubble burst, with many SPACs underperforming or even failing, leading to a sharp decline in their use. But could a revival be on the horizon?

In 2024, there are signs that the SPAC market could be on the path to recovery. From new regulations aimed at reducing risks to high-profile investors dipping their toes back into the market, SPACs may yet again become a key player in global financial markets.

Understanding SPACs: A Brief Overview

Fundamentally, a SPAC is a shell company created for the sole purpose of raising capital through an initial public offering (IPO) with the intent to acquire or merge with an existing private company, thereby taking it public. Unlike traditional IPOs, SPACs allow companies to go public more quickly and with less regulatory scrutiny. SPACs typically have a two-year window to find a target for acquisition, and if no deal is made, they must return the funds to investors.

During the pandemic, SPACs became a popular vehicle for companies, particularly in volatile sectors like technology and electric vehicles (EVs), to bypass the complexities of a traditional IPO. However, many of these deals soured, leading to massive losses for retail investors.

The Rise and Fall of SPACs

Between 2020 and 2021, SPACs saw unprecedented activity. In 2020 alone, over 240 SPACs were launched, raising $83 billion, with 2021 seeing even higher numbers. High-profile companies such as Lucid Motors, Virgin Galactic and DraftKings went public via SPACs, creating a sense of optimism around the vehicle's potential.

However, the rapid rise in SPAC activity was unsustainable. As many companies went public at inflated valuations, post-merger stock performance often disappointed. Lucid Motors, for instance, saw its stock plummet by over 85% after its much-hyped SPAC merger. According to Bloomberg, SPAC deals left investors with $46 billion in losses in 2023 alone. With mounting regulatory scrutiny and a slew of high-profile failures, the SPAC market sharply contracted by 2022, and many predicted its demise.

Signs of a Revival in 2024

Despite the doom-and-gloom surrounding SPACs in recent years, there are clear signs that the market could be reviving in 2024. According to SPAC Research, over $5.4 billion has been raised by SPACs since mid-2024, with veteran investors like Howard Marks' Oaktree Capital and Harry Sloan returning to the SPAC market. In addition, Wall Street heavyweights such as JPMorgan's Jamie Dimon have commented on the potential for SPACs to fill the void left by a sluggish traditional IPO market.

One of the driving forces behind this revival is the introduction of new regulations by the U.S. Securities and Exchange Commission (SEC). These new rules, which took effect in mid-2024, are designed to provide greater transparency and protection for investors. The SEC has mandated stricter disclosure requirements, particularly around financial projections, which were a key factor in many SPAC failures. Additionally, SPAC sponsors are now under pressure to complete deals within 12 to 18 months, shortening the time frame for identifying a target.

Notable Deals and Sectors to Watch

The revival of SPACs has seen some notable deals. For example, Oaktree Capital is back in the game, having raised $175 million for a new blank-check company. Meanwhile, Avi Katz's GigCapital Global and Lawrence Ho’s family office have also launched new SPACs, raising significant sums. Additionally, sectors like technology, healthcare and consumer goods are attracting attention, with investors hoping to avoid the mistakes of the past.

One bright spot in the SPAC landscape has been the performance of DraftKings, the fantasy sports and betting company, which doubled in value after its SPAC merger. This has provided hope that with better management and more reasonable valuations, SPAC deals can succeed in the future.

Challenges and Risks

Despite the optimistic signs, many challenges remain. First, the scars from the 2020-2021 SPAC boom are still fresh. As noted, many SPAC deals resulted in significant losses for investors, leading to scepticism about the vehicle's viability. In 2023 alone, at least 21 SPAC-backed companies filed for bankruptcy.

Moreover, investor confidence is not easily regained. The failure of high-profile deals, such as the SPAC mergers involving WeWork and Lordstown Motors, has left retail investors particularly wary. SPAC sponsors, often criticised for taking disproportionate gains while leaving regular investors holding the bag, will need to work harder to restore trust.

Additionally, higher interest rates and inflationary pressures in global markets may further complicate SPAC deals. For instance, many companies that went public via SPACs during the boom were valued at inflated levels, often driven by market exuberance rather than fundamentals. A more disciplined approach to valuations is needed if SPACs are to regain legitimacy.