IPOs vs. SPACs: Who will win in 2021?
2020 was a surprisingly good year for IPOs, but it was an even better year for Special Purpose Acquisition Companies (SPACs).
There were 194 traditional IPO deals raised $67 billion, the best year since 2014, according to Renaissance Capital. But it was an even better year for SPACs, which raised just about the same amount: 200 SPACs raised about $64 billion.
SPACs are companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses. They were a small part of the investing landscape until a couple years ago, but their popularity has exploded in the last couple years.
Who's going to win in 2021? Market participants say there is room for both.
"If you combine IPO and SPAC volume of $130 billion, these numbers exceed anything we have seen since the internet bubble," Kathleen Smith from Renaissance Capital, which provides IPO research to investors, told me.
Smith's ETF, the Renaissance Capital IPO ETF (IPO), a basket of 50 of the largest companies that have gone public over the last several years, has been a big beneficiary of the interest in IPOs this year. After years of relative underperformance the IPO ETF is up 100% this year and recently hit historic highs. Assets under management now exceed $500 million. Returns have been boosted by pandemic-driven demand for digital economy (e.g. Zoom, Pinterest) and biotech (e.g. Moderna) stocks that are typical constituents of the IPO market.
SPACS on a roll
But SPAC are on a roll as well, and undeterred by prior criticisms about SPACs in general.
"SPACs bring many advantages to the capital raising process," Gil Ottensoser, head of SPAC Banking and Capital Markets at BTIG, told me, including:
Full transparency. SPACs must file an S-4 when announcing a company they are seeking to buy that contains much of the same disclosure and risk outlines that is in the S-1 that an IPO must file.
Sponsors with expertise. Bill Ackman, Michael Klein, Chamath Palihapitiya and private equity firms like Apollo Global, Solamere Capital, TPG Capital have all come into the space recently, lending credibility to the SPAC enterprise.
Ability to use forward-looking guidance. Because the SPAC is a public company, when it announces the company it is buying, the SPAC is able to provide forward-looking guidance on the company. "Investors get to see even more information about the target company than they would in an IPO," Ottensoser told me.
An easy exit. Investors unhappy with the target acquisition can get out by selling their shares before the acquisition is finalized.
2021 playbook: more of the same
Who will win in 2021? IPOs and SPACs are both subject to the same rules of the game when going public: much of it depends on market conditions. An up market, and an improving economy, will be helpful to both camps.
Smith says there will be plenty of big-name unicorns that will likely use the IPO route to go public in 2021, including SpaceX (Space vehicles), Stripe (mobile payments), Waymo (Alphabet's autonomous vehicle), and Instacart (grocery delivery).
Her IPO ETF will be one of the first ETFs to include Airbnb and DoorDash when they go public this week.
Paul Dellaquila, who runs the Defiance Next Gen SPAC ETF (SPAK), a basket of recent SPAC offerings, expects the profile of SPACs to only increase in 2021, now that it has so many big names behind it.
"Nothing succeeds like success," Dellaquila told me. "Up until a couple years ago, most SPACs were small-cap affairs with low profiles. Then companies like Virgin Galactic and DraftKings went public via SPACs, which greatly lifted the profile." Both are among SPAK's biggest holdings.
Next up, says Dellaquila: sports teams. He says RedBird Capital (Billy Beane of "Moneyball" is an investor) is seeking to take a sports team public, perhaps Fenway Sports Group.
Even staunch IPO proponents like Kathleen Smith says there is room for both IPOs and SPACs. She notes the SPAC offerings keep many money-losing stocks out of the regular IPO market, making it a better quality structure.
Assuming the markets hold up and the economy improves, the sheer number of SPACs currently seeking acquisitions (210, according to BTIG, all with time limits of 18 to 24 months maximum) implies that 2021 will be at least as strong as 2020.