2020 has been described as the “Year of the SPAC,” but capital raised by the vehicles is less than 4% of the dry powder available to buyout funds
2020 has been described as the “Year of the SPAC,” but capital raised by these vehicles is less than 4% of the dry powder available to buyout funds
Sir Richard Branson has become the latest high-profile figure to jump on the SPAC bandwagon. On 16 September, VG Acquisition Corp filed documents for a $410mn IPO of a special acquisition company (SPAC) that would target sectors in Europe and the US where Branson’s Virgin Group has experience, including travel & leisure, financial services, health & wellness, technology & internet-enabled, music & entertainment, media & mobile, space, and renewable energy.
SPACs have boomed this year, with Branson’s vehicle taking the number launched in 2020 to 104 and the amount raised to a combined $40bn, according to SPACInsider. The amount raised is already more than 3x the 2019 total and a far cry from the start of the latest SPAC boom in 2014, when 12 IPOs raised a total of $1.7bn (see chart).
SPACs are in direct competition with buyout houses for assets but, for all the noise, are minnows. Total capital raised by SPACs this year is less than 4% of the $851bn uninvested equity available to buyout funds globally. US-focused buyout funds have an estimated $504bn of dry powder, Europe-focused funds $228bn, and Asia-focused funds $100bn according to Preqin Pro.
The recent track record of SPACs suggests investors should pay more attention to prospectus risk factors. Of the 223 SPAC IPOs since the start of 2015, just 89 had completed mergers and taken a company public, according to analysis by Renaissance Capital in July. Of these, common shares delivered an average loss of 18.8% and a median return of -36.1%, compared to the average aftermarket return of 37.2% for traditional IPOs since 2015. Only 26 of the SPACS in this group (29%) had positive returns. By comparison, the five-year horizon IRR for buyout funds at December 2019 was 16.2%.
SPACs have proven lucrative for founders and advisors. VGAC’s prospectus leads on Sir Richard being a “renowned global entrepreneur” and other SPACs have been launched by Kevin Hartz (an early-stage investor in PayPal, Pinterest, Uber, and Airbnb), and star hedge fund manager Bill Ackman. According to its prospectus, VGAC will rack up $9-10mn of expenses for the IPO, with a further $14-16mn to be paid out in deferred underwriting commissions.
Some alternatives managers are already tuned in to the trend. In 2015 TPC created TPG Pace Group to provide permanent capital to companies, with SPACs one of the structures promoted. Going forward, the distinction between SPAC sponsors and private equity sponsors will likely blur further, with buyout firms adopting the model to suit certain specific circumstances, though the traditional limited partnership structure that has served the industry so well will remain the dominant force.