The rise of SPAC: Fast-track to fortune or flop?

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  Quantumrun Foresight
• December 5, 2024

Insight summary

The surge in Special Purpose Acquisition Companies (SPACs) in 2020 brought significant shifts to public markets, offering companies a quicker, less regulated path to go public. However, the appeal of SPACs has waned as many struggled with financial challenges post-merger, leading to high liquidation rates and cautious investor sentiment. Governments and regulators may respond to this trend by introducing tighter regulations to increase transparency while companies and investors reevaluate the SPAC model's long-term viability in a more controlled environment.

The rise of SPAC context

The rise of SPACs marked a significant shift in the financial landscape between 2020 and 2021. This structure, also called "blank check companies," allows businesses to go public without the traditional Initial Public Offering (IPO) process. SPACs are formed with no commercial operations; their sole purpose is to raise capital through an IPO to later merge with or acquire an existing company. During the COVID-19 pandemic, this method gained popularity as market conditions with low interest rates and surging stocks enticed investors to seek high-yield opportunities. According to Nasdaq, SPACs accounted for 59 percent of all new listings in 2021, revealing the extent of their dominance over conventional IPOs in a booming market.

While SPACs present faster timelines and lower fees than traditional IPOs, their success depends heavily on the sponsor's ability to identify a lucrative target and execute a smooth merger. Often, SPAC sponsors have minimal financial risk but gain a substantial stake if the merger succeeds, motivating a swift deal-making approach. However, this accelerated pace and lower regulatory scrutiny can result in companies that are unprepared for the rigors of the public market. Notable SPAC examples include WeWork and 23andMe, which struggled post-merger due to operational and market challenges. SPAC Track, an independent data monitor, reported that out of the nearly 1,000 SPACs launched since 2020, over one-third have liquidated by 2024, showing the volatility and risk inherent in these arrangements.

The SPAC market saw a steady decline as rising interest rates and market volatility impacted investor enthusiasm. By 2022, liquidation rates surged, with 196 SPACs closing, as reported by SPAC Track. The trend continued in 2023 and 2024, and many SPACs are currently trading below their IPO prices. While the SPAC model has shown resilience by offering an alternative path for companies to go public, its limitations have become apparent. The fate of these companies signals a broader caution, suggesting that SPACs, while useful for some, may need closer oversight and strategic alignment to remain viable.

Disruptive impact

Investors may grow cautious, especially since many high-profile SPAC-backed companies underperformed, resulting in significant financial losses for retail investors. Additionally, individual investors may reassess the appeal of these vehicles, potentially leaning toward more traditional or diversified investments. The trend may also create skepticism about companies that use SPACs, as they often enter the market with limited financial histories, which impacts trust and confidence. Furthermore, with increased SPAC liquidations, individuals may need to conduct deeper research into both the sponsors and targets of SPACs before investing, shifting away from the initial excitement that characterized the market.

Companies considering SPAC mergers may start weighing the risks of such a path more carefully, understanding that the reduced scrutiny might hinder long-term stability. Additionally, businesses planning to acquire a SPAC for public listing may prioritize financial and operational readiness, as early-stage targets have faced challenges adapting to the public market. Service sectors that support public companies, like accounting, financial advisory, and compliance, may see increased demand as SPAC targets seek guidance to handle post-merger requirements. Furthermore, traditional IPOs may regain popularity, as they offer companies a more gradual entry into the public market, which could attract stable, long-term investors.

Meanwhile, governments may need to adapt regulations to keep pace with SPAC trends, balancing investor protection with market efficiency. Financial regulators, particularly the Securities and Exchange Commission (SEC) in the US, have already begun scrutinizing SPACs, considering additional rules to increase transparency and accountability. In addition, governments may consider requiring SPACs to disclose more about their target selection process, financial viability, and long-term projections, which could protect investors from high-risk investments. Policymakers might also explore incentivizing traditional IPOs to encourage companies to follow routes with more structured financial and operational disclosures. 

Implications of the rise of SPAC

Wider implications of the rise of SPAC may include: 

• SPACs shifting public trust in financial markets as more individuals become wary of high-risk investments lacking proven financial histories.
• Technology adoption acceleration in green energy, allowing startups to scale operations faster.
• Governments implementing stricter guidelines around SPAC transparency, which might increase regulatory costs but enhance public accountability.
• Shorter public timelines for companies increasing pressure on founders to prioritize quick growth over sustainable business practices, affecting long-term viability.
• Financial advisors developing specialized SPAC investment strategies, potentially attracting more retail investors while catering to risk tolerance and portfolio diversification.
• Rising interest in SPACs among foreign markets leading to increased cross-border investments, influencing international regulatory cooperation on securities laws.
• SPAC-backed companies that struggle post-merger increasing job volatility, particularly in high-growth sectors like tech.
• New educational programs focused on alternative public listing methods emerging in business schools, equipping future professionals to handle non-traditional IPOs.
• Political interest in curbing excessive market speculation leading to policies that closely monitor SPAC outcomes, aiming to stabilize investor sentiment.
• Companies leveraging SPACs to focus on niche industries, resulting in a rise in highly specialized markets that foster targeted product development.

Questions to consider

• How could SPACs impact your personal investment choices and approach to financial risks?
• How might increased transparency in SPAC deals change your trust in the public market?