SPACs Are Still the Rage, But S&P 500 Has Been a Better Bet
SPACs Are Still the Rage, But S&P 500 Has Been a Better Bet
(Bloomberg) -- The hottest trend in finance is failing where it matters most -- at least so far.
Wall Street firms helped raise billions since 2016 to fund special purpose acquisition companies, or SPACs, but investors would have been better off buying the S&P 500, according to a Bain & Co. analysis published Monday. The majority of mergers done through blank-check firms from 2016 through 2020 underperformed the U.S. benchmark.
In its annual global private equity report, Bain focused only on SPACs that completed acquisitions. Of the 121 transactions it reviewed, 60% have lagged behind the S&P 500 since their mergers, and more than 40% of the stocks were trading below their $10 initial public offering price as of Jan. 25. Investors who bought an S&P 500 index fund at the end of 2015 more than doubled their money over the next five years.
The key to performance rests with the financiers who are raising the SPACs and whether they’re picking quality companies to take public, said Hugh MacArthur, head of Bain’s global private equity practice. The results probably won’t be evident for a few years, he said.
“We’re going to see a lot of uneven results in the next couple of years until we get that business model sorted out and really the future of what this asset type is going to look like,” MacArthur said in an interview.
SPACs were among the most prolific participants in the IPO market last year, with more than 200 blank-check companies raising more than $80 billion, data compiled by Bloomberg show. The pace has accelerated, with more than $50 billion raised so far this year, the data show.
SPACs are typically created by a sponsor, usually well-known executives, private equity or venture capital firms with the goal to raise money for yet-to-be identified future investments. If no targets are found within two years, the blank-check firm is dissolved and cash is returned to investors. In case of a takeover, shareholders can retain their shares or redeem their holdings if they don’t like the deal.
In recent months, private equity giants including Apollo Global Management Inc., KKR & Co. and TPG have sponsored SPACs. In KKR’s case, the investment vehicle aims to raise $1 billion to target deals in the consumer or retail industries, according to a prospectus. Private equity firms also used SPACs to offload assets. Last year, Blackstone Group Inc. and CVC Capital Partners agreed to take online payments firm Paysafe Group Ltd. public by merging with a blank-check firm led by investor Bill Foley.
“As pressure to produce share appreciation grows, sponsors will have to bring stronger due diligence capabilities to the party to analyze and vet their highest-potential targets,” Bain said in its report. “The big wins will involve underwriting ways to turn a good company into a great one.”
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