The use of special-purpose acquisition companies (SPACs) to go public boomed in 2020. The growth of these blank-check companies has exploded even more in the first quarter of this year.
Reuters reported that so far in 2021, SPACs have already raised more than the $83.4 billion that they raised in all of 2020. That’s according to SPAC Research, an industry tracker.
The process involves raising cash through an initial public offering (IPO). Then the shell company, which has no actual operations, goes on the hunt for a company or companies to buy. The SPAC method of reeling in cash has beat out the $29.5 billion raised so far this year by IPOs of existing companies, per data from IPOScoop.
“If you had told me at the beginning of the year that we would already exceed 2020 totals before the end of the first quarter, I would not have believed it. It’s been quite phenomenal, and there are no real signs of the momentum stopping meaningfully anytime soon,” said Carlos Alvarez, head of permanent capital solutions at UBS Group AG.
According to SPAC Research, the $200 million IPO of Build Acquisition Corp. on Tuesday (March 16) pushed the total raised by U.S. SPACs (through IPOs) above last year’s total.
At this point, 408 SPACs with $131.1 billion in cash are looking for companies to strike deals with. As a general rule, noted Reuters, a SPAC typically merges with a company three to five times its size. This all adds up to a possible $600 billion in purchasing power.
However, it has often been star power that has attracted retail investors. Numerous blank-check companies have been endorsed by Wall Street billionaires, celebrities and athletes, including Jay-Z, Shaquille O’Neal and Ciara Wilson.
Michelle Lowry, a Drexel University finance professor, said that when newbies buy into SPACs, it’s more like gambling than investing. “We saw this during the internet bubble,” Lowry said. “There were a record number of IPOs and huge first-day returns, and everybody’s talking about it.”