SPAC-ing Disruption

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SPAC-ing Disruption

We recently caught up with Matt, a longtime friend and DataTrek client, who also happens to be a US listed exchange traded fund veteran and deep subject matter expert. We’ve long bucketed ETFs as “Disruption” because they fit the Christensen model to a “T”: start with a low-end product that has a unique edge (SPY, an index fund with very low fees) and then climb the value chain (bond funds, commodity funds, actively managed funds, etc.). That’s exactly how ETFs have developed over the last 20 years, just like how Amazon started with books or Honda started with Japanese scooters for Tokyo’s noodle shop delivery people.

The topic of our conversation – Special Purpose Acquisition Companies, or SPACs – also hits the theme of “Disruption”, but more in terms of a platform than a product. They are a way for a private company to go public without doing an IPO or direct listing. In the best-case scenario, a pedigreed SPAC management team buys a piece of an exceptional company in an industry they understand and 2+2 adds up to 7 or 8.

And then there’s the worst-case scenario, where it all goes wrong. For example, I have known a fellow named Steve Girsky for close to 30 years. Steve was the most highly regarded US auto analyst of the 1990s, then went on to help resurrect GM after the Financial Crisis, and after that started VectoIQ. If that company sounds familiar, it is because its SPAC merged with Nikola. Yes, Nikola of the hydrogen powered trucks and scathing short-seller reports. Long way of saying: SPAC deals are unpredictable even when there’s excellent talent at the acquiring company.

Still, cautionary tales such as that didn’t do anything to cool the SPAC market earlier in 2021. Data from SPAC Insider (link below) shows that:

  • In 2020, 248 SPACs went public for a total of $83 billion in gross proceeds.
  • For 2021 YTD, there have already been 326 SPAC IPOs for $104 bn in gross proceeds.
  • Both stats are well above 2019’s pre-pandemic levels of just 59 SPAC IPOs for $14 bn in proceeds.

The takeaway here is that there are, right now, several hundred already public and funded SPACs with a collective 9-figure checkbook looking for private companies to buy. The hot properties/targets are often disruptive technology companies. We’ve seen SPACs invest in autonomous vehicle tech, EV batteries, space, biotechnology, and similar investment themes. SPACs generally have 2 years to make an acquisition, so the clock is ticking for those who have not found a target yet.

How long before any unwelcomed alarm bells ring is a topic of conversation right now. SPACs have gone from heroes to not-quite zeros in recent weeks. There are press reports that disruptive company founders are now less interested in going public in this manner. And investors have cooled on providing financing.

Still, we doubt SPACs will disappear entirely. We’re simply going from a frothy, easy market to one where everyone has to actually do some work to get deals across the finish line. We’ve lived through – and done deals in – enough IPO cycles to know that sometimes transactions are easy and sometimes they’re not but, at the right price, markets always clear.

Matt has been working on 2 recently launched ETFs that capture the yin and yang of the SPAC market and might be of interest to you if you’re looking into the space. One is a basket of recently “de-SPACed” companies – those where the acquisition has gone through – which trades under the symbol DSPC. It holds equal weights in 25 positions, rebalanced monthly and with a 1-year holding period from when an operating company goes live in public markets. The other is a 1x short version of that basket with a daily reset that trades under the symbol SOGU. The two will not be mirror images of each other given SOGU’s daily reset, of course.

Summing up: the jury is out on whether SPACs will accelerate disruptive innovation or prove to be 2021’s version of the late 1990s Internet 1.0 bubble. It’s not a cop-out to say the answer is likely “Both”. For all the lousy late 1990s IPOs, there was also Amazon (1997), eBay (1998), and Priceline (1999). No doubt the same will be true with SPACs – a raft of losers, but a few winners that will eventually drive overall US equity market returns.

Sources:

SPAC Insider (data on the industry): https://spacinsider.com/stats/

Information on DSPC and SOGU: https://despacetfs.com/