Special purpose acquisition companies, or SPACs, have been all the rage in 2020—but do they have staying power?
Stacey Cunningham, president of the New York Stock Exchange, certainly thinks so.
“The SPACs of yesteryear are nothing like the SPACs that are listing today,” Cunningham said Wednesday during the virtual Fortune Most Powerful Women Summit. She had been asked if she thought the financing method—in which a shell company goes public with the purpose of acquiring a yet- unnamed business and effectively also taking that business public via reverse merger—was a fad that would come and go. ”The New York Stock Exchange did not use to list SPACs,” Cunningham noted. “We actually started listing them in 2017 with a change in our rule structure.”
SPACs have soared in popularity in 2020 as the pandemic has forced some companies to rethink their funding. That has encouraged some investors to create so-called “blank check” companies in the hopes of investing in a business impacted by the shift to technology being caused by the COVID-19 crisis. According to Refinitiv, a record $40.9 billion has been raised through 118 SPACs so far in 2020, about four times the amount raised during the same period a year ago. SPACs have been involved in the recent public offerings of controversial electric-truck maker Nikola, among others.
SPACs aren’t completely new: Blank check companies boomed in 2007, too, amid frothy capital markets, before receding into the background.
Cunningham notes that the trends that led to the popularity of the SPAC predated the pandemic (and hopefully will outlast it). Increasingly, investors and bankers see more innovation around the traditional IPO process. As private markets have grown flush, for instance, venture-backed businesses such as Spotify and Slack have found less need to raise cash in public markets. But they still require a way for their investors to cash out—and thus the direct listing, a process by which companies only sell existing shares and pay a smaller banking fee, has grown in prominence. On Wednesday, two more tech companies, Asana and Palantir, also made their public debut via direct listing on the NYSE.
“I think across direct listings, IPOs, and SPACs, we’re going to see people get more creative with what elements of each of those they want to leverage as they come to the public markets,” Cunningham said. “Now we have a menu [of options to go public]. Companies can choose an IPO if they want the infrastructure and the shareholder base, or a direct listing if they want to reduce their cost of capital, or a SPAC if they want control over negotiating terms with a single counter-party.”
In a way, the menu has become more customizable. Unity, a gamemaker, chose to go public through the traditional IPO route. But the company also shook up the process, also shook up the process, pricing the IPO themselves rather than relying on bankers, and also let employees sell shares from day one instead of instating the multi-month lockup period typical of most IPOs.