Recently, I've seen several articles focused on the performance of SPACs for retail investors. Most of those concentrate on the negatives of past SPACs in what is a classic case of the map no longer being the terrain.
The first iteration of the SPAC dates back to the early 1990s. But, it wasn't until 2017 that the NYSE began listing them after a series of regulation reforms by the SEC.
SPACs started off relatively small, the typical raise was less than $100M and seen as a last resort. Today, SPACs have ballooned to an average of $380M and are often used for successful companies with unique or defined capital needs.
It's clear that today's SPAC looks nothing like the first versions. They are what I would call the modern era SPAC.
More capital is being raised, the quality of sponsors has increased, and the companies deciding to go public via this route have increased in quality.
These SPACs give retail investors the chance to play the de facto LP in a growth round. A $10 per share initial investment can grow to 3-5X and the sponsor gets their "carry" via founder's shares and warrants.
Just like with any investment, SPACs require the investor to pick the right team. A study by McKinsey recently found that SPACs led by operators (defined as a board with current or former C-suite execs at the helm) outperformed those led by purely by financial or investment professionals by 40%.
Operator-led SPACs behave differently from other SPACs in two ways: they specialize more effectively, and they take greater responsibility for the combination’s success.
Can SPACs be used disingenuously? Absolutely. We've seen oil and gas firms suddenly realize that the energy transition must be at the center of their strategy.
Are there companies that likely should still be private? Yes. There are several climate or energy transition startups that should not be in the public markets. I continue to believe that growth equity will mature in the private market and SPACs will look more like direct listings in the future.
Will there be failures? Absolutely. Nikola might never make it to market with a vehicle. QuantumScape's batteries may never materialize.
All that being said, there are good companies out there that have SPAC'd and will return 3-5X or more to their initial investors.
Most of those investors bought into the SPACs at $10-15 per share because they couldn't afford the Telsa's of the world. To me, that's a net positive for our financial system and the energy transition.