Wall Street Gets Experimental with IPOs — SPACs Are Gaining Popularity

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Lately I’ve been spending a lot of time thinking about Airbnb.

See, as you may or may not know, the company planned to go public this year. An IPO that was shaping up to rival some of 2019’s biggest floats. An offering that would compare to those of Uber or Lyft.

Then the coronavirus came along and kind of threw a spanner in the works.

Airbnb was forced to wait and watch from the sidelines. Assessing just how badly the pandemic would hit their business.

It was probably a blessing in disguise. Because had they gone public before the virus hit, the fallout for their stock may have been irreparable.

Today though, things are a little different.

The Nasdaq is consistently breaking new highs. Driven higher by the tech stocks that dominate its board. And overnight, the S&P 500 even did its best to follow suit. Falling just short of its own record high.

Suffice to say, US markets are on a tear.

Which is why it’s no surprise that Airbnb has confirmed that the IPO is coming. Apparently looking to file the paperwork later this month.

A move that will no doubt set the stage for a fascinating float.

But, what is more surprising is the fact that, as far as 2020 goes, it’s pretty atypical…

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The SPAC craze

This year Wall Street has become inundated with ‘special purpose acquisition companies’. More commonly known as ‘SPACs’.

Or, as some refer to them: blank cheque companies.

The reason for this, as the name suggests, is because SPACs have a singular purpose. They are companies without commercial operations or strategies. Their only goal is to raise capital via an IPO to then use to acquire another business.

Here’s how Investopedia describes the usual process behind a SPAC:

SPACs are generally formed by investors, or sponsors, with expertise in a particular industry or business sector, with the intention of pursuing deals in that area.

In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don’t identify that target to avoid extensive disclosures during the IPO process. (This is why they are called “blank check companies.” IPO investors have no idea what company they ultimately will be investing in.)

Sounds pretty wild and risky, right?

You bet it is. Which is why, despite being legitimate ventures for decades, SPACs haven’t really been all that popular.

They’re like the ‘lucky dip’ of investing. Except you know, with millions or even billions of dollars at stake rather than some cheap prize.

Here’s the thing though, lately SPACs have become all the rage.

In 2019 their popularity began to soar. With some huge sums of money being used to facilitate some big deals. Virgin Galactic, for example, was one of the biggest SPACs to go public last year.

2020 though, has gone even further. With roughly US$23.9 billion worth of SPACs popping up to date. Accounting for one in every five dollars raised from IPOs in the US this year.

Which begs the question, why choose a SPAC over a regular IPO?

Ferocious appetites

The main benefit to opt for a SPAC listing over an IPO is speed.

They will get a company into the publicly traded domain far faster than your usual IPO. Forgoing much of the time-consuming paperwork and negotiating.

It’s similar to a reverse takeover, but far more calculated and to the point. Again, because the SPAC is purely a cash vehicle, it makes the process far smoother.

On top of that, SPACs can also be a cheaper way to go public to. Not just because of the time saved, but also by bypassing the typical fees and charges that come with an IPO. But long term it can be hard to evaluate whether one is better than the other in terms of real returns.

What is clear though, at least recently, is that these SPACs can burn very bright, very quickly.

Virgin Galactic, for example, soared as much as 255% after its debut. Before quickly having its boom cut short by the COVID-19 bust earlier this year. While DraftKings, a sports betting company that also listed via a SPAC, net investors a 149% return at its peak.

My point is, there is a lot of enthusiasm in these SPAC stocks. Investments that come with certain narratives that really hook people. And that’s helping drive this frenzy in companies that may or may not deserve it.

And while these SPACs are purely a Wall Street phenomenon, there are signs of similar narratives in our own markets as well. Be it stocks, property, or even a certain precious metal.

The difference is that SPACs can deliver on a story far quicker than a regular IPO. Which brings me back to Airbnb, and why I’ve been paying it so much attention.

Because as big as its float will surely be, I can’t help but wonder if it missed its window of opportunity. Investors are moving at a breakneck pace, jumping into the ‘next big thing’ nearly every other week.

At least, that’s how it seems to me.

Whether it will all end in tears or fortunes though, I cannot say.

I am very fascinated to find out though. Because whatever the outcome, there will be plenty of new opportunities for everyday investors to take advantage of.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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