By Phil Mackintosh, Chief Economist, Nasdaq
With the world on lockdown, 2021 saw a significant increase in the popularity of special purpose acquisition companies (SPACs) as a way to bring private companies public. It also made some well-known private equity managers accessible to public investors. Looking back, we see that 2021 saw 613 SPAC listings, raising a total of $145 billion – an increase of 91% from the amount raised in 2020.
We have previously done an introduction to SPACs and how their lifecycles work. Today we update some of that data to see if the rush of newer SPACs has traded and performed consistently with earlier SPACs.
SPAC listings contribute to record IPO year
We noted in November that the U.S. market had already exceeded previous initial public offering (IPO) records set in the 1990s. By year-end, the number of IPOs topped an astounding 1,000 listings, well above the roughly 180 IPOs we previously estimated were needed to offset de-listings and mergers.
SPACs played a large part in hitting the IPO record, representing over 59% of total new listings, an increase from around 53% in 2020 (Chart 1). In fact, even though all other IPOs increased by 88% from 2020 levels, SPAC listings increased almost 150%.
Chart 1: 2021 was a record year for SPACs
SPAC lifecycle is shortening
SPACs that listed between 2008 and 2019 consistently took an average of almost two years to find an acquisition target. From 2015 through 2019, we also saw around 92% of all SPACs complete acquisitions.
That means most of the SPACs that went public during Covid are still too new to have completed their deals. In fact, 82% of 2021 SPACs are still searching for deals, with only around 3% that completed a business combination already.
However, it hasn’t stopped some SPACs from finding acquisition targets quickly. Based on data (Chart 2), the median SPAC that listed in 2021 and completed an acquisition was only around 0.64 years (or just over 7.5 months). That trend is consistent with the slightly older SPACs from 2020, which have also averaged less than one year to complete (and have seen ~50% of SPACs reach completion).
Chart 2: SPACs time to completion and percentage that complete
SPACs on day one
Recall from our previous study that SPACs represent future operating companies. At IPO, the cash raised is put into a trust while management or the sponsor for the SPAC searches for an acquisition target.
Data shows that the typical SPAC raising has remained about the same at around $200 million for the past six years (Chart 3 transition from light to dark grey box). However, the way the grey boxes are shrinking shows a concentration forming at that $200m raise level.
Despite that, and the fact that there are many more SPACs (blue dots), the distribution from small to large had remained fairly consistent (top and bottoms of the lines) with “larger” SPACs typically around $500 million and small SPACs typically raising closer to $40 million.
Chart 3: SPACs continue to raise around $200 million at IPO
We also see that SPACs’ prices have started experiencing a first-day pop – a trend that has historically been common for traditional IPOs (Chart 4). However, the data shows that the average SPAC has gained less than 2% from the IPO price to the closing price on the first trading day, with a more typical pop at a much lower 50 basis points (bps). That’s much lower than the typical first-day IPO performance of closer to 18% historically. But it is in line with the lack of news about the SPACs’ eventual target company or acquisition valuation as well as their underlying structure, which more closely resembles a term deposit at that time.
Chart 4: SPACs are starting to “pop” on day one
SPAC trading across the lifecycle
As we noted before, trading patterns change over the lifespan of a SPAC:
- IPO: At the time of IPOs, SPACs generally experience low volatility.
- Acquisition: Volumes only really start to increase once an acquisition target is identified.
- Completion: Once the business combination is complete, trading tends to remain volatile, more consistent with other new operating companies – reflecting the range of investor views of the target company’s business model and uncertainty around future earnings.
At an overall level, we also see a spike in volatility and trading (line thickness) when news becomes available and the SPAC nears a life-stage switch. That also makes sense, as that is when new information adds to a valuation reassessment and a new period of price discovery.
Chart 5: SPAC volatility varies across the lifecycle
Quoted spreads (bids and offers you see on the screen) for SPACs tend to be wide. However, effective spreads more accurately reflect the actual costs of trades. Similar to our findings before, updated data shows that effective spreads remain low and constant throughout the lifecycle. That suggests that market makers are able to provide liquidity in the SPAC when needed, but it also means investors should avoid “market” orders in SPACs, which may execute at the far side of wider screen spreads.
Chart 6: Spreads are generally constant throughout the lifecycle
SPAC performance over time
Also consistent with our previous findings, SPAC performance varies over time. The charts below look at the performance of SPACs that successfully completed an acquisition from 2019 through early November 2021.
Average returns are positive, gaining over 40%. However, the data suggests a lot of the positive return comes at the end of the pre-announcement period and at the end of the first year as an operating company. Average returns are also boosted by a few strong outperformers. The median return is closer to flat, even post-completion.
We also don’t adjust for stock-market returns here, mostly because all SPACs more closely resemble a term deposit until they find an acquisition target, so the appropriate benchmark shifts over the lifecycle too.
Chart 7: SPAC average and median unadjusted returns
Additionally, we note that the majority of SPACs have slightly positive performance pre-completion (in green on the left side of chart 8). This contrasts with some of the media’s focus on specific SPAC tickers that have fallen below their IPO price.
However, after a merger is announced, stronger valuation differences are priced in, and the distribution of performance widens, with around 25% of SPACs gaining more than 100%, while about 50% of SPACs drift down to record losses versus their common share first trade price, mostly after they complete their business combinations.
Chart 8: Distribution of SPAC performance at each stage in their lifecycle
Conclusion
SPACs serve as an alternative way for private companies to enter the public markets and give the public access to more early-stage growth companies and private equity-like investment managers.
While the popularity of SPACs has risen in recent years, leading to record listings and capital raised, the data shows the new SPACs seem to be performing and trading consistently with historical SPACs.
Regardless, SPACs are different than operating companies, mutual funds or ETFs. So it’s important for investors to consider how the trading characteristics of SPACs change throughout their lifecycle and to be aware of the range of expected performance outcomes before they invest.
Robert Jankiewicz, Research Specialist for Economic and Statistical Research at Nasdaq, contributed to this article.
