Glut of SPACs will lead to ‘heartbreak,’ say IPO experts

If the business world had a word of the year, chances are the choice for 2020 would be “SPAC.” The term, which rhymes with whack, stands for Special Purpose Acquisition Company and describes a public firm whose sole purpose is to acquire another company.

While SPACs have been around for years, they have taken off like never before as Refinitiv reports there had been 165 such listings as of October—more than double last year’s total, and five times the 2015 total.

This glut of SPAC listings means that some of the new shell companies will be unable to find a suitable target to acquire—or will overpay for a mediocre firm, stiffing investors in the process.

“It’s a heartbreak looking for a place to happen,” says Lise Buyer, the founder of Glass V Group, a consultancy that provides advice about public listing.

Buyer made the remark at Fortune‘s virtual Brainstorm Tech conference where she spoke alongside Ashley MacNeill of Morgan Stanley and Paul Ryan, the former Speaker of the House who is now Chairman of Executive Network Partnering Corp, a SPAC that listed this summer.

Ryan and MacNeill agreed with Buyer’s sentiment that there are too many SPACs in relation to companies that are suitable acquisition vehicles. MacNeill, who is shepherding Airbnb’s planned IPO, said there will be a bifurcation in the future between high and low quality SPAC companies.

Ryan, meanwhile, claimed that the conventional SPAC model, in which founders obtain a 25% stake in the venture, creates misaligned incentives that can stiff ordinary investors. His firm, he says, has created a superior model of SPAC in which the founders receive 5% and can only earn a further 20% if the stock in the acquired company goes up.

All of this reflects how the range of options for companies to go public has evolved in recent years. Buyer noted that, in the past, SPACs were a preferred vehicle of companies operating in controversial industries such as cannabis or gambling, but that now all sorts of companies are using them.

At the same time, Buyer noted the biggest beneficiary of SPACs has been the investment banks that help administer them. This may be changing, though, as more companies seek alternate models beyond SPACs and traditional IPOs.

Buyer credited Slack and Spotify—both of which conducted their IPOs via direct listings—with causing more companies to explore going public in non-traditional ways. She recommended an auction model as among the best options for a company to raise money in public markets.

As for the effect of COVID on raising capital, MacNeill said it has accelerated existing trends, including shorter lockup periods. Another result, said Buyer, has road shows going virtual—a process she says is superior because it lets a company visit more potential investors without having to hopscotch all over the country.

As for SPACs, Ryan said they are still an excellent investment vehicle if designed correctly. He claimed Executive Network Partnering Corp’s has been 100% oversubscribed thanks to its novel incentive model.

“I do see a yearning for something new and different that gets companies where they want to be,” said Ryan.

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