A Primer on SPAC Formation Growth Drivers and Their Impact on Capital Markets

By: Montana Timpson

Over the past year, SPAC formation has increased heavily — 248 SPACs came to market in 2020, accruing funding of approximately US$83.4 billion, and 189 have launched already in 2021, garnering US$60.3 billion* this year alone.

SPAC market growth stems from a number of factors, including private companies pursuing an alternative to the costly and time-consuming IPO process, institutional investors seeking alternative sources of yield and retail investors aiming to access private assets, which have historically been out of reach. Here’s a primer on SPAC formation growth drivers and their impact on capital markets.

SPAC Units
SPACs,” special purpose acquisition companies, are publicly listed shell companies that are set up with the intention to merge with a private target company, enabling it to trade publicly. For insight into the basics of SPAC formation and funding, visit A Spec on SPACs for Professional Traders. At their core, these “blank check companies” exist to raise capital through an IPO for the purpose of acquiring an existing company. Last year alone, SPACs outpaced even traditional initial public offerings (IPOs) in the stock market, raising more than US$83 billion, to IPOs’ US$67 billion.

Industry Volume
According to BofA Global Research, depending on activity levels in a period, SPACs are driving about 30% of IPO industry volume, 10% of Equity Capital Markets (ECM) industry volume and a single-digit percent of mergers and acquisitions (M&A) activity. Many analysts expect these volumes to grow, as more SPACs find their primary market.

Growth Drivers
There are multiple growth drivers for the surge in SPAC activity over the past year. First, demand by retail investors for private investment opportunities has flourished following previously limited access in the past. Second, SPACs provide an alternative to the traditional, extensive disclosure process presented by the IPO route — given the level of market volatility in 2020, efficiency in getting to the market can be an incredible asset. Third, interest in SPACs has garnered momentum due to several high-profile investors stepping in to back SPAC funding, from credible banking names like Credit Suisse and Goldman Sachs to celebrity figures across multiple industries.

What SPAC Growth Means for M&A
Measuring past trends and projected growth, many industry experts expect SPAC-related M&A revenues to remain elevated and potentially trend higher in the coming year. With continued investor interest, 2020’s elevated IPO levels and the typical 18-to-24-month SPAC M&A timeline, it is likely that the SPAC frenzy will continue onwards for the next year to come.

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*Data as of Feb. 26, 2021

The author does not own any SPACs or recent IPOs mentioned in the article.

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