The Rise Of The SPAC

2020 has arguably been the year of the Special Purpose Acquisition Company, or SPAC. SPAC’s are formed for the purpose of executing a merger between two entities, a private company, and the public SPAC. These “blank check” companies are created to take private entities public without going through the typical IPO process, which allows for flexible liquidity and a quicker turnaround. These SPAC’s go through an IPO process to raise capital and will either acquire or merge with the intended entity on an agreed-upon date. In 2020 so far a record 178 SPAC’s have filed for IPO, up from just 59 last year with a total valuation of $62 Billion(1). These companies have gone parabolic this year, notable names include Nikola Motors (NKLA:NYSE) and DraftKings (DKNG:NYSE). Nikola’s SPAC (VTIQ) was formed by a handful of ex-General Motors executives. The danger in this system lies in the fact that upon investing early, you are essentially investing solely in the people. Until the company releases information on the intended recipient of the merger, anything can happen. That being said, upon execution of the merger between VTIQ and electric vehicle company Nikola Motors, VTIQ was trading at $33. VTIQ’s 25 million share IPO was priced at just $10. Positive news about the merger had given the markets a lightning rod and within the first few days of the ticker change, NKLA traded to $79.73. The hype around Nikola Motors was insane, with volume in the tens of millions for days straight. News was everywhere on Nikola, and rumors had completely consumed the stock. I believe that easily accessible trading platforms such as Robinhood allowed this stock to gain such momentum. It raises so many important questions about how the markets perceive emerging growth markets now. Nikola Motors turned out to be problematic in so many forms (now trading at $21.06), but the tremendous hype that lived in the stock’s veins was incredible. This tells us two things; investors believe in the future of EV’s, and they love SPAC’s. The concept behind the SPAC is exciting to investors because of the rumorous climate in which they dwell. I find it thrilling to hear about the prospect of a merger or acquisition happening with a revolutionary company, because anything can happen. Blank check companies have formed in just about every sector this year, but there is a problem. They underperform traditional IPOs. Since 2015 “(SPAC’s) delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs”(2). So why are people loving these SPAC’s? They usually fizzle out, are highly volatile, and incredibly unpredictable. The reasoning behind the explosion lies partly in the psychology of young people, and the overall market's perception of the future. Young investors flock to new exciting ideas like Nikola Motors with their hydrogen powered fuel cells and clean energy semi-trucks. In doing so, they are showing us what they perceive the future to look like. Other examples of this can be seen by taking a look at aerospace company Virgin Galactic (SPCE:NYSE), whose stock is up 118% since it’s SPAC inception just over a year ago. Virgin’s success tells us that people believe the future will hold commercial space travel, just like they trust in the future of EV. Given these two examples, I think SPAC’s are great tools for identifying trends in the long term. The market loves Tesla (TSLA:NYSE) because of the innovation and prosperity it holds for the future. I think Tesla can be viewed in the same capacity here. SPAC’s tell us that people are excited about space, and intend to largely move away from fossil fuel’s. EV and Aerospace are just two examples of many sectors that can be analyzed to find trends. These trends have an enormous impact on emerging growth markets, and I think investors should examine how SPAC’s perform in the short term, say 3-4 months post merger while actively studying price fluctuation and catalysts. This will provide a deeper understanding of how investors truly value certain industries and their potential capabilities in the long run. With that being said, be cautious about going long on SPAC’s. If you can get in on the excitement early enough, your account may be printing money. Otherwise, stay timid and you’ll probably thank me.

1. “SPAC IPO Transactions Statistics - by SPACInsider.” SPACInsider, 14 Nov. 2020, spacinsider.com/stats/.

2. Renaissancecapital.com. “Updated: SPAC Returns Fall Short of Traditional IPO Returns on Average.” Renaissance Capital, www.renaissancecapital.com/IPO-Center/News/71816/Updated-SPAC-returns-fall-short-of-traditional-IPO-returns-on-average.