By Ciara Linnane, MarketWatch
After a record 82 initial public offerings of special purpose acquisition corporations — known by the acronym SPAC — 2020 seems to have upended the traditional IPO market, yet most offer lower returns on average than conventional deals, according to a report.
Of 223 SPAC IPOs conducted from the start of 2015 through July, 89 have completed mergers and taken a company public, offering the chance to examine their performance, according to the report from Renaissance Capital, a provider of IPO ETFs and institutional research. Of those 89, the common shares have delivered an average loss of 18.8% and a median return of minus 36.1%. That compares with the average after-market return from traditional IPOs of 37.2% since 2015.
As of July 24, only 26 of the SPACs in that group had positive returns, the study found.
SPACs, also known as blank-check companies, have been around since the 1980s, but have become a juggernaut this year amid high levels of liquidity and a strong appetite for new growth companies.
SPACs raise money in an IPO, and then place it in a trust while the sponsor searches for a business or businesses to acquire, usually within a two-year period. The companies then complete a merger and the target becomes a listed stock. Recent examples include sports-betting operator DraftKings Inc. /zigman2/quotes/213120645/composite DKNG -0.60% , electric truck maker Nikola Corp. /zigman2/quotes/208704275/composite NKLA -0.79% and space travel company Virgin Galactic Holdings Inc. /zigman2/quotes/208333884/composite SPCE -7.67% .
“It’s a back door to going public and avoiding scrutiny,” said Kathleen Smith, Principal at Renaissance. “You hear about the moonshots, like DraftKings and Virgin Galactica, which have done well, but the average return is negative. You can’t just blindly go in and make money.”
DraftKings went public via a merger with SPAC Diamond Eagle Acquisition Corp. and a gambling tech business, SBTech Global Ltd., earlier this year. The renamed DraftKings has been on a tear, gaining 258% in the year to date, even as major sports events were canceled during the pandemic.
Nikola merged with VectolQ Acquisition in June and immediately benefited from the cult status enjoyed by fellow electric vehicle maker Tesla Inc. /zigman2/quotes/203558040/composite TSLA -1.21% , which has propelled that stock to record levels this year. Nikola has gained 232% in the year to date.
Virgin Galactic’s route to public markets came through a merger with Social Capital Hedosophia last October. The stock is up 35% in 2020, outperforming the S&P 500 ‘s /zigman2/quotes/210599714/realtime SPX +0.34% 5% gain and the Dow Jones Industrial Average’s /zigman2/quotes/210598065/realtime DJIA -0.10% 2% loss.
The recent crop of SPAC mergers have performed better than the broader group, the report found. The common shares of the 21 SPAC mergers completed in the period from Jan. 1 to July are averaging a return of 13.1% from their offer price, but that’s mostly due to the two highest performers — DraftKings and Nikola. Without those two, the SPACs produced better returns than in the period going back to 2015, but are still a negative 10.5%. That compares with the 2020 IPO market’s average aftermarket positive return of 6.5%.
The trend isn’t expected to end anytime soon. SPACs have raised a record $31 billion in 2020 to date, and new announcements are coming every day as investors seem to be racing to join the club. The year also brought the biggest-ever SPAC, when billionaire hedge-fund manager Bill Ackman took one public in July with more than $4 billion in its kitty to spend.
At the time, Ackman said he was “long-term bullish” on America and the stock market, although he was bearish on highly indebted companies.