2020 has been an extraordinary year, and the COVID-19 pandemic has shaken the foundations of our lives and the financial markets. During uncertain times, the traditional way of raising capital through IPO has suffered. IPOs are inherently risky. It is a time-consuming process of roadshows, elaborate investors pitch meetings, and intense scrutiny of audited financial statements to raise capital for an IPO. This year brought upon a perfect storm for special purpose acquisition companies, commonly referred to as SPACs.
SPACS are shell companies or blank-check companies that do not have actual commercial operations. Their sole purpose is to raise capital through an initial public offering (IPO) with the intent of acquiring other companies. SPACs are a less complex, faster, and less expensive way to raise capital through an alternative IPO approach as they generally skip the roadshow process and do require any financial statements.
SPACs in one form or the other have been in existence as early as the 1990s. They are typically the last resort for smaller companies that require capital to go public. The past year witnessed a record number of SPACS filings. Over 165 SPACs were listed this year or nearly double the number of global SPAC IPOs issued during the entire 2019. A few highly visible SPACs such as Virgin Galactic (SPCE), DraftKings (DKNG), and Nikola Corporation (NKLA) have raised the legitimacy and popularity of this alternate form of IPO.
Since SPACs do not have previous operations or financial statements, their track record depends on the reputation of the management teams. Reputable SPAC sponsors include such high profile investors as Chamath Palihapitiya, the founder of Social Capital and former Facebook executive, Bill Ackman, the founder of Pershing Square Capital Management, Steve Girsky, former GM chairman, and Gary Cohn, former director of the National Economic Council under President Trump and former president of Goldman Sachs) helped put SPACS front and center.
SPAC success stories such as Virgin Galactic (SPCE), Nikola (NKLA), and DraftKings (DKNG) have also given investors another investment vehicle to explore. Are SPACs a market fad, and will they continue to grow at a rapid pace? It is difficult to know if the demand for SPACs and the billions poured into global SPACs will continue at its current torrid pace after the pandemic stabilizes. Like the recent Cryptocurrencies (i.e., Bitcoin) trend, it depends heavily on several factors such as investor sentiment, risk appetites, regulators, demand for specialty SPACs, and the competition from the traditional IPO market for raising capital.
Picking the next winners of individual SPACs may prove to be challenging for many investors. Unlike the traditional IPO offerings, investors that buy SPACs may not necessarily know in advance the acquisition target. Investing in SPACs is a leap of faith in the reputation of the SPAC's management team. A record number of companies pursuing mergers with SPACS as a way of going public has sparked a fire in Wall Street among professional investors. Mom-and-pop retail investors have also followed suit, accelerating the demand for SPAC stocks. While some SPAC deals have been phenomenally successful, many others have left investors with losses.
A new SPAC ETF will allow investors to access the most liquid SPAC IPOs through a diversified basket. The Defiance Next Gen SPAC Derived ETF (SPAK- 26.77) tracks the Indxx SPAC and Nextgen IPO Index. The ETF consist of 66 holdings rebalanced every quarter with 80% weighting applied to IPO companies that derived from SPACs and 20% weighting to common stocks of newly listed SPACs. The top holdings: DraftKings Inc. (DKNG – 13.25 weighting), Clarivate PLC (CCC – 9.48%), VERTIV Holdings CO (VRT – 7.75%), Hyliion Holdings Corp (HYLN – 7.08%), Virgin Galactic Holdings Inc. Co (SPCE – 5.96%), Vivint Smart Home Inc. (VVNT – 5.11%), Open Lending Corp. (LPRO – 3.99%), Repay Hldgs Corp. (RPAY – 2.71%), Immunovant Inc. (IMVT – 2.62%), and Broadmark Rlty Cap Inc (BRMK – 2.52%).