SPACs: Lessons from a boom and bust cycle (2020-2024)
SPACs (Special Purpose Acquisition Companies) experienced spectacular growth between 2020 and 2021, before undergoing a brutal correction. This investment vehicle, often referred to as a “blank check,” transformed the landscape of initial public offerings before revealing its limitations. For finance students, the history of SPACs offers a fascinating case study in market cycles, financial innovation, and the risks associated with complex products.
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The Rapid Rise of SPACs (2020-2021)
The concept of SPACs is not new—it has been around since the 1990s—but their popularity exploded during the pandemic. In 2020, 248 SPACs raised $83 billion, and then 613 SPACs raised $162 billion in 2021, accounting for more than half of all IPOs in the United States. Several factors explain this boom:
The search for returns in a low interest rate environment has pushed investors toward riskier assets. SPACs offered a faster and less expensive alternative to traditional IPOs, which was particularly attractive to tech startups and growth companies.
Personalities such as Chamath Palihapitiya (Social Capital) and Bill Ackman (Pershing Square) popularized SPACs, attracting the attention of the media and the general public. The process seemed simple: raise funds, find a target, merge, and potentially make quick profits.
Iconic successes
Some SPACs have been hugely successful. DraftKings, which merged with Diamond Eagle Acquisition Corp in 2020, saw its share price increase fivefold. Virgin Galactic, backed by Chamath Palihapitiya, also performed well after its merger with Social Capital Hedosophia.
These successes created a ripple effect, with hundreds of SPACs launched in various sectors: green technology, fintech, biotech, and even space. The media talked about a “SPAC revolution,” drawing comparisons to the tech IPOs of the 1990s.
The warning signs of a correction
By 2021, signs of overheating had begun to appear. The SEC began to scrutinize SPACs more closely, warning against conflicts of interest and exaggerated claims. Several transactions were postponed or canceled due to due diligence issues.
The market was also flooded with low-quality SPACs with weak targets or excessive valuations. “Zombie SPACs” — those that could not find a target within the allotted time frame — began to appear, forcing liquidations.
The crash of 2022-2023
The correction was brutal. In 2022, the IPOX SPAC index fell 60%, and in 2023, 75% of listed SPACs were trading below their $10 issue price. Several factors contributed to this decline:
The rising interest rate environment made speculative assets less attractive. Investors became more selective, demanding strong fundamentals rather than promises of growth.
Several SPAC transactions disappointed after the merger. Lordstown Motors, Nikola, and WeWork saw their share prices collapse, calling into question the quality of the targets selected.
The SEC has tightened its stance, imposing new rules in 2022 to improve transparency and protect investors. These regulations have increased costs and risks for SPAC promoters.
Lessons learned from the SPAC experience
For investors: Due diligence is crucial. Many investors have lost money by following the hype without analyzing the fundamentals of the targets. Not all SPACs are created equal—the quality of the management team and the potential target is essential.
Conflicts of interest are real. SPAC promoters make money even if the transaction fails, which can create perverse incentives. Investors need to understand this dynamic.
For companies: SPACs can be a valid option, but not always the best one. Some companies have found the post-merger process more complex than expected, with increased reporting requirements and shareholder pressure.
Preparation is key. Companies that have been successful with SPACs were prepared for public market requirements, with strong financial teams and robust reporting processes.
For regulators: Financial innovation requires balance. The SEC has responded to excesses, but without completely stifling the market. New rules impose greater transparency on conflicts of interest and financial projections.
Investor protection remains a priority. Regulators continue to monitor misleading statements and abusive practices in the SPAC market.
The state of the SPAC market in 2024
After the crash, the SPAC market stabilized at a more reasonable level. In 2024, there are about 50 SPACs per year, compared to more than 600 in 2021. Several trends are emerging:
SPACs are now focusing on specific sectors where they can bring real added value, such as green technologies, biotech, and defense. Targets are generally more mature, with clearer revenues and profitability prospects.
SPAC structures are evolving, with increased protection mechanisms for investors, such as extended redemption rights and performance guarantees. Sponsors must now invest a portion of their own capital in the transaction, better aligning their interests with those of investors.
Alternatives to SPACs
The decline of SPACs has led to the emergence of alternatives:
Direct public offerings (DPOs) are gaining popularity, allowing companies to go public without raising new funds. Spotify and Coinbase have popularized this model.
Traditional mergers with listed companies remain a viable option for some companies. These transactions often offer more flexibility than SPACs.
Lessons for finance students
The history of SPACs offers several valuable lessons:
Understanding market cycles is essential. SPACs illustrate how enthusiasm can lead to excesses, followed by painful corrections. Students must learn to identify signs of overheating.
The importance of due diligence cannot be underestimated. Many investors have lost money by neglecting this crucial step. Students must develop skills in financial analysis and risk assessment.
Financial innovations carry risks. SPACs show how new products can create opportunities, but also pitfalls. Students must learn to evaluate innovations critically.
Regulation evolves with the markets. The history of SPACs illustrates how regulators adapt rules to protect investors without stifling innovation. Future finance professionals need to understand this delicate balance.
Conclusion
The rise and fall of SPACs is an instructive chapter in recent financial history. This cycle shows how innovation, market enthusiasm, and regulation interact to shape financial products. For finance students, this story offers valuable lessons about market dynamics, the importance of due diligence, and the risks associated with complex products.
As the SPAC market stabilizes, these vehicles will likely continue to play a role, but in a more measured and regulated manner. The lessons learned from this experience will help future finance professionals navigate more cautiously through the sometimes murky waters of financial innovation. The history of SPACs serves as a reminder that, in finance as elsewhere, cycles repeat themselves, and that caution and rigorous analysis remain the best tools for avoiding the pitfalls of passing fads.
