In 2021, SPACs Gave U.S. Capital Markets their Leading Edge
If we learned anything this year it is that SPACs are resilient enough to withstand a correction and flexible enough to adapt to the changing market conditions. They work because they deliver tangible benefits to companies, sponsors and investors, both large and small.
These vehicles, designed for the sole purpose of taking privately held companies public via an M&A transaction, triggered a record year in IPOs and helped democratize Wall Street by giving retail investors access to promising growth companies in a safe, transparent manner.
Consider some of their benefits they have delivered:
A resurgence in publicly listed companies. Bigger and more robust public markets are a plus for the American economy. From 1999 to 2017, our public markets were shrinking: the number of publicly listed companies on U.S. exchanges fell roughly 50 percent. That trend has now reversed, in part, because of SPACs. As of early November, there had been more than 900 U.S. IPOs in 2021 and more than 500 of them were SPACs.
By providing a faster, simpler, and cheaper way to go public, SPACs have helped revitalize our public markets, providing more opportunities for investors to generate wealth.
Greater access to emerging companies for the small investor. The U.S. has created dozens of exciting growth companies in recent years whose market values have skyrocketed.
Unfortunately, most of this newfound wealth accrued to a small circle of private investors because those companies chose to stay private for extended periods of time. When they did finally go public, the greatest gains were in the rear-view mirror. SPACs, by contrast, have given retail investors a chance to get in on the ground floor of dynamic companies in industries like fintech and electric vehicles whose best days are yet to come.
Strong guardrails to protect the retail investor. SPACs don’t just give investors the opportunity to get in early; they provide that opportunity with unique protections and added transparency. In all SPACs, public IPO investors have redemption rights. That means they have a long period of time—usually months—to evaluate the target business selected by a SPAC and decide if they want to remain as shareholders of that target business after the SPAC acquires it. The SPAC is required to make full disclosure of its target’s business and financial conditions in SEC filings, which are accessible to everyone. In the end, if they decide a particular target is not to their liking, they redeem their shares at the price they paid for it in the IPO, while continuing to hold the warrants that were part of the IPO units. Effectively they can make a modest profit with minimal risk.
The SPAC market is self-correcting in a way that benefits retail investors. When the SPAC market slowed this year, SPAC sponsors responded by contributing more of their own money to make the offerings more enticing. In practice that meant that when an investor chose to redeem, they could receive an extra 1 to 2 percent added to their return, making SPACs a more attractive investment alternative than T-bills.
America’s capital markets are the strongest and most robust in the world – and SPACs are helping to maintain that position. Currently, the U.S. is far and away the market leader in SPAC listings,. but exchanges in Frankfort, Amsterdam, London and Singapore have all taken steps this year to add SPAC listings. To maintain its prominance, and to ensure that this country continues to attract the best new companies, the U.S. will need a regulatory and political environment that is supportive of SPACs, recognizing that these vehicles are here to stay and are an important part of the U.S. capital markets of the future.