Blank Check IPOs, the Status Symbol of 2020, Have Raised $32 Billion This Year

(Bloomberg Businessweek) -- The new big-money status symbol of 2020 is running your own blank check company. Hedge fund billionaire Bill Ackman has a new one. Oakland A’s executive Billy Beane, who was played by Brad Pitt in the film Moneyball, got into the game with an initial public offering in August. Even former U.S. Speaker of the House Paul Ryan is getting one going.

So what’s a blank check? Formally known as a special purpose acquisition company, or SPAC, it’s an investment vehicle that goes public despite having no real business. The plan is to raise money from investors and use it to buy into another company, typically a private one that’s yet to be chosen. More than 40% of 2020’s IPOs by volume have been SPACs, raising $31.6 billion, more than double all of last year’s volume of $12.4 billion. And last year was a record breaker, too. “Three to four years ago, SPACs were just a curiosity,” says Niccolo de Masi, chief executive officer of two blank checks, DMY Technology Group Inc. and DMY Technology Group Inc. II, that together raised more than $500 million. “Now it’s an option for everybody.”

The blank check boom—or maybe fad—stems from the collision of two big trends. The first is historically low interest rates. With safe bonds paying less than 1% and stocks trading at high valuations, more investors are willing to park their money with a SPAC in hopes of getting lucky with an acquisition that pays off big. Second is the long-running boom in private equity and venture capital. Investors who poured money into buying companies over the past decade want to cash in by selling them. So there are plenty of companies for SPACs to buy. Add to these an old constant: financiers looking for new ways to earn a fee from a transaction.

The pandemic-induced market volatility in March, which made it difficult for conventional companies to go public, helped bring SPACs into the spotlight. Being bought by a SPAC can be an easier way for a private company to go public: It can skip the usual roadshow for pitching investors and avoid some of the scrutiny that goes with an IPO. Online sports betting company DraftKings Inc. became a public stock in April after completing a merger with Diamond Eagle Acquisition Corp. in a $3.3 billion deal. As is customary in such “reverse mergers,” the SPAC took the name of the business it bought. When the stock price popped from around $10 a share for Diamond Eagle before it announced the deal in December to a peak of $43 in June as DraftKings, it helped add to the buzz around blank check deals.

You may not be surprised to learn that there’s a Reddit board devoted to SPACs. The boom has at least one veteran of the industry concerned. “We’re in silly season in SPAC-land,” says Martin Franklin, who’s raised six SPACs in the U.S. and the U.K. since 2006 and has another in the works. “This is going to end badly.”

Investors seem particularly fascinated with the latest blank checks because they’re getting into futuristic businesses. Luminar Technologies Inc., a Peter Thiel-backed company that develops the sensor technology behind driverless cars, announced plans to merge with a SPAC on Aug. 24. The Richard Branson-founded space tourism company Virgin Galactic Holdings Inc. went public via a blank check in 2019.

But the investors who fund SPACs when they first go public aren’t necessarily counting on moonshots. They’re typically institutions such as hedge funds, and the companies offer them the combination of a relatively small downside with a chance to make a tidy profit down the road. Blank checks typically go public at $10 a share and have 24 months to find a target. If the company fails to identify one, it liquidates, and investors get their money back. Investors also get to vote on a deal and have a chance to redeem their shares whatever the result. For that reason, SPACs tend to trade around their $10 price until a deal is announced (or sometimes rumored). In addition, the initial investors in a SPAC get warrants, which entitle them to buy more shares at a set price after the company makes an acquisition.

SPACs aren’t riskless, though—particularly if you buy after a deal is announced and the stock has soared above $10. And once a deal is finalized, the shares can fall below that price as easily as any other stock’s. Of the 18 companies that went public via SPAC mergers in the past year, 11 are trading for less than $10 a share. SPACs are partly a bet on the skills of the sponsors who lead the companies while hunting for a target—often money managers or well-known executives.

Even the most prominent sponsors can have flops. As with private equity and hedge funds, one of the best ways to make money on a SPAC is to start one. As part of their compensation for finding a company, sponsors are generally able to purchase 20% of the SPAC’s stock for a very small amount, typically $25,000. They are also offered warrants. That means they end up getting a chunk of the shares of the company the SPAC acquires for very little money. Because their compensation dilutes the value of shares, it’s part of the cost to a company of going public through a SPAC deal, offsetting some of the fees it saves by not doing a conventional IPO.

Ackman is taking a different route with his newest SPAC, Pershing Square Tontine Holdings Ltd. In essence, his compensation will kick in only when the merged company trades 20% above the offer price. Pershing Square Tontine is the biggest SPAC to date, having raised about $4 billion. Ackman says he wants to buy a minority stake in a “mature unicorn”—a private company with a valuation of $10 billion or more.

Currently there are 120 SPACs with $40 billion to spend, according to data from SPAC Research. DMY Technology’s de Masi predicts that the market will soon split into two categories: a few top sponsors able to make attractive mergers and everyone else.

That doesn’t mean the stars won’t have competition. On Aug. 24 four software companies announced plans for traditional IPOs, and another, Asana Inc., said it would do a direct listing—that is, go public by making existing private shares available to trade on exchanges rather than selling new shares. Thiel’s Palantir Technologies Inc. filed for a direct listing the next day. Investors may soon find out whether SPACs are a new way of doing business or just the latest shiny object in a bull market.
 
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