Whatever Happened to SPACs?
we explore the unique dynamics that culminated in the SPAC bubble of 2020 - 2021, and examine how some companies have attempted to carve out a path for success in spite of these challenging…
Remember SPACs? It's hard to believe today, but in the darkest days of the pandemic, special purpose acquisition vehicles (hence the acronym) were all the rage. Activity peaked in Q1 2021, with more than 300 SPAC exits. As a quick refresher, let's turn to the Investopedia definition: 'A special purpose acquisition company (SPAC) is a company without commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company.' Today, this activity is a glimmer of its former self. In fact, since the broader market correction that commenced earlier this year, SPACs have grinded to a virtual halt. 'Almost 800 out of the 1,288 SpACs raised since 2020 remain without a closed deal,' cites PitchBook. However, what happens to those companies that were listed publicly via SPAC? What happens when investor appetite sours, but the show must go on? Here, we explore the unique dynamics that culminated in the SPAC bubble of 2020 - 2021, and examine how some companies have attempted to carve out a path for success in spite of these challenging circumstances. Pressure for returns To contextualize the euphoria around SPACs in early 2021, it is important to understand the evolution of venture capital investing in the last decade. The prevailing trend that has defined this era has been the tendency for high-growth companies to stay private for longer. In fact, the number of publicly-traded firms decreased by almost half in the years between 1990 and 2016. Many factors are behind this trend, including the rise of non-traditional venture investors pushing later stage valuations, an increase in technology sophistication enabling greater access to pre-IPO markets, and the prevalence of a low-interest rate environment driving investors to alternative asset classes in search of the elusive alpha.Historically low interest rates helped fuel the SPAC boom.Getty Images Part of this pressure was spurred by the increase in non-traditional private market investors. This is a trend that is expected to persist: according to PitchBook's Q3 US venture capital outlook, non-traditional investor participation in venture rounds reached all-time highs of $260 billion in 2021, and has surpassed $145 billion thus far in 2022. Meanwhile, these longer holding periods have led to increased pressure for realizations. Analysts predict that exit activity is unlikely to meaningfully rebound in 2022. This puts investors in a bind. For traditional GPs, at a certain point realizations must start accruing into track records. Capital commitments and liquidity pressures come knocking on the doors of non-traditional investors like pension funds and endowments. SPACs a liquidity solution
Given this complex dynamic, what made SPACs such a popular solution? A few factors help to explain this, and all are related to the unique structures of the vehicles themselves. For one thing, IPOs are expensive. As Professor Nikolai Roussanov of the Wharton School explains, 'A young, capital-hungry, but pre-revenue firm, the IPO route is not usually available.' Second, SPAC mergers benefit from 'safe harbor' status, which is a protection from legal liability with regards to forward-looking statements. This allows less stringent reporting requirements, which is another boost in the eyes of younger, less established firms wishing to access public market liquidity.
Ironically, the same characteristics that made SPACs so appealing in the eyes of investors and companies alike, inadvertently led to its demise. As it turns out, companies that are trying to hide information probably have a reason for wanting to do so. Furthermore, the unique set of factors that made SPACs attractive started to dissipate. Once the Fed embarked upon its aggressive interest rate increase program to curb inflation, the days of flush liquidity and excess cash were numbered.Bird: a victim of the SPAC bubble.Getty Images
What happens now?
The downturn in the SPAC market has been swift and brutal. 'Companies that went public via blank-check deals have been among those worst affected' by the market selloff of 202, wrote CNBC. To add salt to the wound, 2022 has also had the highest number of withdrawn SPAC deals on record. What does life look like for companies today that went public during the height of this frenzy?
Pagaya is a consumer-driven technology finance company that went public via a SPAC merger in June 2022. At the time, the company was valued at more than $8 billion. Today, Pagaya's stock trades at $0.57, compared to a high of $29.40 shortly after the public listing. Amidst this backdrop, it may be hard to be optimistic. However, this is precisely how CEO Gal Krubiner feels about the fintech's long-term growth prospects.Pagaya is a fintech focused on consumer lending.SOPA Images/LightRocket via Getty Images
'If you do this right, you make the lives of so many people so much better,' explains Krubiner, 'the most important thing as a leader is to know what you are not good at.' By all accounts, it appears that Pagaya has succeeded in establishing itself as a leading AI platform for lenders. Their platform looks beyond traditional data points such as credit reports and FICO scores and examines a wide variety of data, ranging from previous purchases to job history, to curate a more comprehensive underwriting profile.
In spite of the challenging macroeconomic environment, Pagaya has been able to achieve significant wins. As part of its Q3 earnings announcement, the company shared that application flow for lending products continued to hold strong. 41 million applications were evaluated in the first nine months of 2022, representing 120% growth compared to the same period in 2021.
Krubiner maintains that publicly listing via SPAC was a valuable tool in helping the company connect with a broader base of investors. His ultimate vision for Pagaya is to continue to serve as a powerful enabler in the lending ecosystem. 'Think about the single person where the decision around a loan went from ‘no' to yes.' It's hard to explain the impact and power of that. Ultimately, I wish for Pagaya to be big enough to support many more of these moments, wherever they are. '