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ANALYSIS: SPAC IPO Market Share Ascends to 30%, But Prices Dive

April 9, 2020, 9:06 AM

The popularity of Special Purpose Acquisition Company (SPAC) initial public offerings (IPOs) continued their strong upward trajectory in the first quarter of 2020, with thirteen IPOs completed, according to data from Bloomberg Law.

That represents nearly 30% of all IPOs—by a class of fundraising that once carried a strong stigma after numerous instances of fraud against investors. Are SPACs now normalized? The fact is, levels of interest in SPACs in the first quarter matched those of life sciences, a component of consumer, non-cyclicals comprised of biotech, pharmaceutical, and health care companies.

SPACs are blank check or shell corporations that raise money in an IPO, then hunt for an attractive merger or acquisition target. The flexibility of SPACs as an investment vehicle has made them a very attractive option in recent years for private equity backers and IPO investors alike.

A key factor in SPACs shaking off their previous bad press has been the protection of investors’ money. Capital raised is placed in a trust account, so the fraud of days past cannot be repeated. SPAC managers generally have two to three years to find a suitable target and complete a reverse merger. SPAC investors are then given the option of either staying in the deal if they like it or redeeming their shares plus interest.

Given the trust safeguard and the opportunity to step away from a deal in the future if it is not to an investor’s liking, SPACs generally trade very close to their standard $10 per share offer price after completing their IPO and before the SPAC announces a deal for a target. However, the determined undertow of the new bear market in equities brought all 13 of the quarter’s SPAC IPOs well under water. Share prices for two of those SPACs have since fully recovered, but 11 remain below their offer price.

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