By Tim Courtney, Chief Investment Officer
Initial public offerings (IPOs) and special purpose acquisition companies (SPACs) have been gaining significant traction. Last year alone, there were 194 traditional IPOs and 200 SPAC deals that, combined, raised nearly $131 billion.1 Below, we examine why the IPO and SPAC markets are heating up and what investors should be mindful of moving forward.
SPACs, also known as blank check companies, are companies with no commercial operations that raise money through an IPO in order to buy another company.2 The goal is to bring a private company to the public sector without some of the constraints of traditional IPOs.
One explanation for the influx of IPOs and SPAC IPOs is the excitement surrounding “coronavirus proof” products or services. For example, in its first day of trading in December 2020, food delivery company DoorDash saw its stock soar 86% above its original IPO price.3 Similarly, DraftKings, the online sports betting, gambling and fantasy sports company, had a market valuation of over $6 billion after completing a SPAC IPO last April.4
While the average SPAC that has executed an acquisition since 2015 has a negative return, the average return on SPACs executed in 2020 was 17%.5 These companies may have solid business models and advantages against the COVID-19 pandemic. However, investors should note these companies’ private owners (the people who are most familiar with the businesses and their potential growth) are moving as fast as they can to sell to public buyers.
On a related note, many are also rightfully concerned about valuations surrounding popular retail trades, such as GameStop and most recently silver as influenced by the Reddit community.6
While more enthusiastic and bullish trading activity has affected prices across the broader markets to some degree, much of the increased activity has been focused on moving prices in specific stocks and in smaller pockets of the market. For these companies, we believe enormous price moves that aren’t justified by future opportunities for growth and earnings will soon revert back to a reasonable level. For broad markets, prices are set for a 2021 recovery in economic re-engagement and corporate earnings as vaccine distribution accelerates.
Even with recovery appearing likely in 2021, we believe we should continue to hold diversified portfolios with exposure to many sectors operating across the world. Concentrating portfolios in few names or small areas of the market has caused many investors to have to rebuild their assets.
If you have questions about these current market conditions, SPACs or IPOs, please contact your Exencial advisor.
1. CNBC.com (12/7/2020) – The 2021 outlook for the booming SPAC market and traditional IPOs
2. Investopedia (11/4/2020) – Special purpose acquisition company (SPAC)
3. The New York Times (12/9/2020) – DoorDash soars in first day of trading
4. MarketWatch (4/27/2020) – Here are 5 things to know about DraftKings, after it went public and fetched a $6 billion market cap
5. The Wall Street Journal (11/3/2020) – Investors flock to SPACs, where risks lurk and track records are poor
6. CNBC.com (2/2/21) – Is silver the next GameStop? Social media may fuel speculation
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