SPAC and the Financial Environment That Got Us Here
Broad equity markets suffered extreme volatility in March 2020 as we began to understand the impact of the COVID-19 pandemic on the economy. As everyone adjusted to the global situation, the capital markets, and equity-linked issuance ground to a halt.
Just a few weeks later, after markets had steadied themselves, SPAC IPO issuance stepped in and started leading the equity capital markets out of the gridlock caused by the global pandemic.
From mid-April until June 2020, we saw over $5 billion of SPAC IPO issuance get absorbed by the market in just under six weeks. To put that in context, that is equal to 40% of all SPAC IPO issuance executed throughout the entirety of 2019. It was effectively a reopening of the capital markets, principally led by SPAC IPOs and the SPAC product in general.
Two Financial Drivers of 2020’s SPACs
- First, there have been a number of very high-profile SPAC business combinations or M&A transactions that have either been announced or have closed from mid-2019 to mid-2020, such as Virgin Galactic, Nikola, and Draft Kings.These deals proved to be a critical driver for subsequent SPAC IPOs. SPAC IPO investors want to be certain that a healthy M&A market is available for SPAC-driven acquisitions after SPACs raise funds in their IPOs. A SPAC is a vehicle that allows manager teams and sponsors to make prudent, well-valued M&A transactions and to take advantage of the combination of management team expertise and favorable private company valuation.
- The second key driver of the strong SPAC IPO market relates to who is getting involved in SPACs — financial institutions, private equity firms and high-profile individuals. From Fortress, Chinh Chu, Blackstone, Apollo, and a number of other very high-profile financial sponsors to individuals sponsoring SPACs, like Bill Foley, Barry Sternlicht, Michael Klein, Chamath, and the Social Capital team, all using the SPACs as a vehicle for raising capital and completing acquisitions. High profile financial institutions and individuals have also brought larger, more sophisticated bankers, lawyers and other service providers whose expertise has helped to raise the profile of SPACs from questionable vehicles in the past to a market go-to alternative now.
The fact that well-known people and advisors, who have reputations for creating value in other endeavors, are getting involved in SPACs brings a level of investor confidence and an increase in the overall value of SPACs that are going public.
The average SPAC IPO size is currently around $340 million, which is the largest average SPAC IPO size we’ve ever experienced. We have also seen three of the top five largest SPACs ever priced come to market in 2020.
This combination of phenomenal market backdrop, careful M&A execution, and strong sponsor pipeline, both from already public SPACs, SPACs that are on file, and individuals involved in the space, will continue to support SPAC IPO trends.
Although the volatility seen in March 2020 has now settled down, we are still in a newsflow-driven and reactionary market. The Federal Reserve has been very accommodating and has significantly grown its balance sheet in the last 2–3 months, which has put a floor under asset values across classes. This includes the equity market, as it remains the only market not given an explicit backstop from the FED.
In volatile financial markets, when capital markets are otherwise gridlocked, SPACs have the advantage of being a first mover. As far as performance goes, SPAC IPOs that have priced within or above their marketed range have performed exceptionally well from a current-offer and offer-plus one-day perspective—in some cases producing phenomenal returns for institutional investors.
In 2020 SPAC IPOs have continued to price unabated, with a very robust backlog in store for the beginning of 2021.
Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a critical element of the SPAC M&A process.
Learn about the current pricing dynamics of D&O insurance for SPACs, as well as the main factors D&O insurance underwriters consider when pricing D&O insurance for SPACs.