The SPAC Craze Is Dying Down, But $200B Is Still Looking For Companies To Buy

The rapid proliferation of special-purpose acquisition companies that began last year and peaked early this year seems to have tapered off, but billions of dollars worth of investment are still waiting for an acquisition.

So many SPACs are still looking for acquisition targets that it seems impossible they will all find something suitable, which could result in either a SPAC returning money to its investors or chasing a bad deal, multiple experts told Bisnow. In a year or two, these blank check companies, which raise hundreds of millions of dollars each before going public with the sole intention of acquiring a private company, could recede back into a niche form of investment or stabilize into something more mainstream, albeit less frothy.

“We’ve ridden the cycle up, it’s destined to fail, and six months to a year later, it’ll come back again, and it’ll come back in a much more pragmatic way,” said Shadow Ventures founder KP Reddy, who sponsored SPACs in the early days after their creation in the 1990s but has avoided investing in the latest rush.

Over $103B has been invested in SPACs this year, already outpacing 2020’s record-setting total of $83B, according to SPAC Research. Of the 570 SPACs that have yet to fully merge with their acquisition targets, 147 have announced upcoming mergers and 423 have yet to identify a target. Combined with SPACs that have begun raising capital but have yet to have their own initial public offerings, over $200B has been invested without any idea of what company that investment will purchase.

“I’d say that if 50 to 60% of these SPACs find targets, that will be a lot,” said Wharton Equity Partners President Peter Lewis, whose company is an investor in proptech firm Latch, which was acquired by a SPAC formed by Tishman Speyer earlier this year.

For real estate, the legacy of the SPAC boom could be a larger number of proptech companies on the public market, or even some more traditional real estate companies seeking capital to expand into new markets via acquisitions. 

“Having that option, that vehicle to go public via SPAC is a good thing,” said Crexi Chief Strategy Officer Eli Randel, who has over 15 years of experience in commercial real estate finance and worked with Invitation Homes in the lead-up to its IPO. “It’s good that proptech companies can have more access to capital, because I think many are on the precipice of being public companies.”

The appeal of a SPAC to the acquisition target — the company that will ultimately become publicly traded — is twofold. The process can avoid the level of regulatory and investor scrutiny that comes with an IPO but with the same result of ending up public. And once the merger is complete, the pre-acquisition capital raise goes onto the company’s balance sheet, like a late-stage venture capital fundraising round and an IPO rolled into one.

The most logical use of such a quick, sizable infusion of capital is to rapidly grow market share, and the fastest way to do that is to acquire other companies, Reddy said. Real estate is a logical pairing with the SPAC model considering how geographically specific it is.

“It makes sense that WeWork would go public via SPAC,” Reddy said. “The smart play would be, let’s create a formula to go acquire small startups and weak companies and roll them all up. So you can consolidate a highly fragmented market, which is a great move for a [company like] WeWork.”

That SPACs became as popular as they did was the product of a special confluence of circumstances. The initial rise in the first few months after the outbreak of the coronavirus pandemic may have been due to something as simple as investors and money managers having more time on their hands than ever before, Lewis and Reddy said. The fact that the global economy all but ground to a halt without damaging large-scale financial liquidity also likely played a part.

“There’s a lot of capital out there, but it’s also something that you can do part time,” Reddy said. “You had some folks spinning up two, three or four SPACs. Because not only is there sponsor capital, there’s [the ability to] leverage sponsor capital.”

For the sponsors who form SPACs, there is very little risk because whatever money they personally invest could be more than offset by the fees and promotes they receive for forming the company. In essence, the pure equity value of the sponsor’s initial investment is beside the point. 

“The lesson right now in SPACs is that it’s a very viable means of financing, but you need to be really, really careful of the sponsor, what’s motivating them and how much stake are they retaining in their acquisition,” Lewis said. 

The crucial step between the formation of a SPAC and its hitting the public market is the private investment in public equity, most often made by large funds or financial institutions. How much a SPAC can raise from PIPEs before its IPO largely determines how much it can spend on its eventual merger. To Randel, PIPEs are a crucial check against the sponsor that can provide a more reliable sense of the SPAC’s value, but Reddy argues that nothing prevents PIPE investors from selling off their stakes as soon as a SPAC goes public, passing on the risk to retail investors.

“You’re in a super-low interest rate environment, so there’s always a bucket of speculative capital available that’s interested in doing something,” Reddy said. “There aren’t a lot of real estate deals going on, [PIPEs are] feeling confident with their money in the public market with those allocations, and it’s essentially free financing.”

The Securities and Exchange Commission considered the risk to investors real enough that it issued a warning in April about checking the nature of a SPAC’s equity and warrant structure.

The ultimate fate of a SPAC begins to shake out once it goes public and retail investors have a chance to buy in. If PIPEs are looking to sell off their shares for a quick infusion of liquidity, they need buyers. Once an acquisition is made, whoever holds the SPAC shares will be the ones who realize the most long-term upside in the case of a success or bear the brunt of a failure.

“The interests [of PIPEs] are not aligned with the public, and you can’t look at it and say, ‘Look at that, UBS has a big chunk of this company,’” Lewis said. “They have different risks and motivations from the person who’s buying the stock in the public domain.” 

Investors who buy into a SPAC before it makes an acquisition have the option of redeeming their shares at their purchase price if they don’t want to be involved with the merged company, but the names attached to a SPAC sponsor are meant to give investors confidence that the decision-makers know what they’re doing — whether earned or not. 

When those who had been familiar with SPACs for years realized things were getting “goofy,” as Randel put it, was when celebrities and athletes such as Jay-Z, Stephen Curry, Serena Williams and former Speaker of the House Paul Ryan started either forming or attaching their names to SPACs. The SEC issued a separate warning in March to retail investors about trusting celebrity-associated SPACs.

“Why do you think some SPACs went to the Shaquille O’Neals of the world?” Lewis said. “Not that there’s anything wrong with Shaq, but he’s not an investment maven, so it’s just window dressing. Joe Main Street on Reddit is interested in that name, and he’s investing.”

The irony of these companies is that if they succeed, no one will remember how they got to the public market in the first place. Regardless of how much it is or isn’t considered a proptech company, WeWork will likely lose its association with SPACs a few months after its merger with Vivek Ranadive’s BowX Acquisition Corp. is finalized.

“Some guys on my team and I were having a conversation this morning, and we were referring to a company, and we were like, ‘Did those guys go public with a SPAC or an IPO?’” Lewis said. “And that happens in a very short time. The SPAC thing will go bye-bye, because you’re just going to put in the ticker symbol and see how the stock’s performing.”

Given that SPACs have a two-year limit after their IPO to find an acquisition target before they are compelled to return the capital they raised to investors, it will likely be at least another year before the creations of the boom that started in 2020 reach their fish-or-cut-bait moments. The financial downside to investors of winding down a SPAC without an acquisition is minimal, and a sponsor stands to lose only the time and labor hours spent forming the company and searching for a target, but that might be enough to push some sponsors into unwise deals.

“Returning investor money, no one gets excited about it,” Reddy said. “So that inherently drives bad deals; it’s such a short-term windfall for the sponsors and the SPAC equity that they don’t care. So you’re going to see bias towards a ton of bad deals. At some point, there will also be some people that just won’t find a deal to get done.”

The fact that SPACs uniformly start out worth $10 per share provides a built-in baseline for measuring the success of a company post-merger. Even optimists like Randel predict that some ill-advised SPAC acquisitions will likely bring down the average market performance of SPACs as a category, but the benefit of such companies going public is that their success or failure will be no secret.

“If a company just struggles for years and years, one could maybe say, ‘Maybe they weren’t ready to be a public company,’” Randel said. “But all things being equal, if they do what they’re supposed to do, get a few quarters under their belt and perform in line with their peer group, then they’ll be judged a success.”

If a newly public company’s first few quarters are disappointments, it isn’t too far a drop from the $10 per share price to getting delisted, Reddy said. Some large-scale investors may hold onto their shares to prevent a company’s value from plummeting, but whether because one lost money on an unsuccessful SPAC or feels compelled to hold for a longer-than-anticipated period of time, the losers of the SPAC boom aren’t likely to come back for another round, experts say. In the long term, the pool of SPAC sponsors will shrink back to those with expertise and proven track records.

“The frenzy has perhaps made underwriting a little looser, valuations a little more aggressive and [lured] some sponsors lacking experience,” Randel said. “But when the smoke clears, you’ll have some really good sponsors targeting good SPAC candidates.”