Updated with correction
The huge increase in the number of SPAC launches in 2020 continues apace, but so far, most institutional investors still are on the sidelines when it comes to investing directly in them.
There were 248 special purpose acquisition company offerings in 2020 with gross proceeds of $83 billion, four times the volume of SPAC transactions in 2019 and an increase in gross proceeds of 510% from $13.6 billion that year, according to data from SPAC tracker SPACInsider.com.
As of Jan. 15, 53 SPAC offerings had been launched in 2021 with gross proceeds of $14.6 billion, according to the website.
Sources stressed that current market conditions are very favorable for successful fundraising via SPACs.
SPACS or so-called blank-check companies have no commercial operations and are formed for the purpose of raising money through an initial public offering in order to acquire a private company, which will become publicly traded after merging into the SPAC.
"The landscape is very beneficial for SPACs given that equity valuations are at all-time (high) levels," said George Antonopoulos, managing partner and portfolio manager at Hudson Bay Capital Management LP, New York, a multistrategy hedge fund firm that has been investing in SPACs for more than 10 years.
"Capital markets are robust, merger and acquisition activity is high, and there is a lot of dislocation in traditional sectors from the impact of COVID-19" resulting in attractive target companies for SPAC sponsors, Mr. Antonopoulos said.
Hudson Bay Capital manages $8 billion.
Attorneys are busy this year structuring SPAC deals, said attorney Keith J. Billotti, co-head of capital markets and corporate securities at Seward & Kissel LLP, New York.
Mr. Billotti said part of the attraction of SPACs for investors is that there are two phases in the process of taking a private company public resulting in two potential investment opportunities.
In the first phase, SPAC sponsors have up to two years to find a company to merge into the SPAC vehicle, he said. The investment is risk-free because the value of units held by investors remain at $10. First-phase investors also get warrants which give them the right to buy more shares within five years. Once the SPAC sponsor chooses the company to take public via the SPAC, capital is returned at par.
Mr. Billotti said few institutions invest in the blank-check company phase because "they want to know what company they actually will invest in." Many asset owners wait to invest until the sponsor identifies the target company, he added.
It's at this decision point — whether to invest in the new publicly traded company — that asset owners tend to take action either by buying the new stock on the public market or through a Private Investment in a Public Equity Issuance, or so-called PIPE, Mr. Billotti said.
PIPE financing is essential because it provides the liquidity needed to return cash to investors in the initial public offering and PIPE investors receive company shares when the company begins trading.