SPACs (Special Purpose Acquisition Companies) Boost Wall Street

SPACs, or special purpose acquisition companies, surged into popularity in 2020. They have continued making headlines in 2021. With their limited downside and huge upside potential for companies and investors alike, SPACs are increasingly becoming a mainstream source of acquisition capital.

U.S.-based SPACs raised $82 billion in capital in 2020, almost six-times greater than the amount they raised in 2019. They have attracted the attention of not only prominent institutional investors, but also celebrities and retail investors. SPACs offer a number of attractive characteristics as compared to traditional IPOs, including higher potential returns and a faster process for going public. More than half of all IPOs in U.S. markets in 2020 were SPAC IPOs.

SPACs Also Known as Blank-Check Companies

SPACs have another name: blank-check companies. These companies bypass the traditional IPO process to take companies public. The money raised in the SPAC IPO is placed in a trust account that earns interest. The trust account retains the funds until completion of a a private company acquisition. Blank-check companies generally have up to two years to complete an acquisition. Once a private target company has been identified, the acquisition process begins. This is otherwise known as the De-SPAC transaction. Private technology and renewable energy companies have been especially popular targets of blank-check companies.

A number of high-profile people have been participating in the SPAC investing trend. Former NBA player Shaquille O’Neal, alongside three former Disney executives, raised $300 million in a SPAC called Forest Road Acquisition in October 2020. They plan to use the blank-check company to acquire a private technology or media company. Just a couple months earlier, a SPAC called Executive Network Partnership Corporation went public. Its chairman is former House Speaker Paul Ryan.

Wall Street Controls Most of the Business

Alongside the success of SPAC investors and companies, the financial and legal advisors facilitating SPAC-related transactions have benefited greatly. A select group of Wall Street banks and law firms have controlled the bulk of SPAC IPO work. Likewise, the group of bulge brackets that comprise the world’s largest investment banks have disproportionately experienced boosts to their equity underwriting businesses as a result of SPACs.

One of the biggest beneficiaries of the SPAC boom is also one of Wall Street’s most powerful banks — Goldman Sachs. Goldman Sachs earned a total of $3.41 billion in fees in 2020, more than any other bank. In the fourth quarter alone, the banking powerhouse took home a record $1.12 billion in underwriting fees. For the first time, the revenue generated from equity underwriting surpassed the revenue from deal-making.

Morgan Stanley was the second largest equity underwriter in 2020, collecting $3.09 billion in underwriting fees. This marked at 81% increase from the previous year. Moreover, similar to Goldman Sachs, Morgan Stanley’s underwriting business brought in more revenue than its deal-making division. In third place, JPMorgan Chase brought in $2.76 billion in underwriting fees in 2020, representing a 66% rise from the previous year.

Jefferies Financial Group, a multinational investment bank and financial services firm, has seen its earnings from underwriting fees triple in the past year as a result of SPACs. It generated $902 million from equity underwriting fees, up from $362 million in 2019.

Law Firms Also Benefit from Advising About SPACs

On the law firm side, SPACs can lead to a continued stream of work. According to Bloomberg data, five law firms accounted for about two-thirds of the SPAC IPO market in 2019. The legal work leading up to the IPO of the SPAC vehicle is just the beginning. Since a SPAC must identify and acquire a private company target within two years of the IPO date, law firms get the additional advisory work associated with the eventual merger. More SPACs has also resulted in more litigation, particularly class action securities lawsuits, creating another revenue stream for big law firms.

In addition to the record-breaking volume of SPAC transactions, these deals have gotten larger in valuation. The average SPAC size has been rapidly increasing, with the average SPAC IPO raising over $300 billion in 2020. The de-SPAC transactions that consummate within two years of the SPAC IPO have similarly increased in value. United Wholesale Mortgage set a record in January 2021 as the largest SPAC deal when it completed a merger with a blank-check company. The deal took the mortgage lender public at a valuation of $16 billion.

SPACs Increasingly Used for Raising Money

SPAC momentum has continued to be strong in 2021. There have already been more SPACs in the first three weeks of January 2021 than there were total in 2019. Queen’s Gambit Growth Capital, a blank-check company led entirely by women, completed its IPO on Wednesday, January 20, 2021. That same day alone, six new SPACs went public. Another eight SPACs went public on Friday of that same week.

SPACs are on track to remain a popular tool for raising money on equity capital markets in 2021 and beyond. Jeff Mortara, head of equity capital markets origination at UBS Group AG, says of SPAC deals: “It’s not a four-letter word anymore. It’s a useful, flexible corporate finance tool. You’re going to see SPACs become a mainstay.”

David Solomon, CEO of Goldman Sachs, predicts SPACs will scale back in popularity to some extent in the near future: “You have something here that is a good capital markets innovation, but like many innovations there’s a point in time as they start where they have a tendency maybe to go a little bit too far and then need to be pulled back or rebalanced in some way. And that’s something my guess is we’ll see over the course of 2021 or 2022 with SPACs.”

Regardless of when the demand for SPAC IPOs winds down, SPACs will have a lasting impact on equity capital markets. As a result of the record number of SPAC IPOs that have occurred recently, in the coming years will we observe many SPACs consummating M&A deals with target companies. Along with bringing innovation to the capital markets, SPACs have attracted a diverse array of market participants.

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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