Goldman Sees SPAC Frenzy Unleashing $300 Billion In Takeovers Next Year

One of the remarkable stories of 2020, one which has sparked many comparisons to 2007 just before the credit/housing bubble popped, has been the record surge of blank-check, or SPAC, issuance where investors - at a loss what to invest in - hand their money to a marquee investor who promises to find an appropriate investment over a given period of time or refund the money.

By way of background, a Special Purpose Acquisition Company (SPAC) is a "blank-check" company formed with the intention of acquiring or merging with another company. The SPAC needs to complete an acquisition within two years or the capital raised must be returned to investors. In a typical SPAC structure, the sponsor raises initial capital by issuing units consisting of 1 share and ½ or ⅓ of a warrant. The shares are generally priced at $10 and the warrants are typically struck 15% out of the money ($11.50) with a 5-year term and an $18 forced exercise.

To quantify the SPAC bubble, a record $70 billion has been raised in 206 initial public offerings by blank-check firms in the first 11 months of the year. Looking at this unprecedented flood into SPACs, some wondered if the good times may be ending: in an interview with Bloomberg last month, Olympia McNerney, Goldman's head of U.S. special purpose acquisition companies, described the U.S. SPAC market as being "perhaps too frenzied" and predicted volumes will become more "rational: as fund managers deal with what she described as indigestion.

"There has been a very meaningful uptick in SPAC issuance and we expect the market to be more selective going forward," said McNerney. One of the reasons why the SPAC euphoria is expected to ease is that as investors allocate more capital to SPACs, some investors have hit internal limits governing their exposure to blank-check firms. But a far more tangible reason why the SPAC froth is likely peaking is also the simplest one: SPACs are no longer a get rich quick scheme: as recently as one month ago, 60% of October’s listings were trading below their offer price, the data show.

And although the recently launched SPAC ETF whose ticker is appropriately SPAK, slumped nearly 15% in following weeks, it has since more than rebounded hitting an all-time high last week.

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