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PSPC could be a bubble that never quite jumps

Sorry, haters: PSPC could be here to stay.

With what appears to be today’s hottest path to a public listing comes a lot of baggage. The basic premise of a special purpose acquisition company is that a sponsor raises funds as part of a public offering in the hope that they will identify a target company for a merger or acquisition within a time frame. specified. As of the market close on Oct. 16, there have been 143 SPAC IPO transactions this year, according to SPACInsider, an online subscription database that tracks SPAC’s performance. There were 13 in all in 2016.

Many believe that the meteoric rise of an asset class that is all about handing over money through blind faith investing speaks more to the current sparkling investment environment than the value proposition of ‘a SPAC itself. With interest rates close to zero and expected to remain so over the next few years, investors are increasingly turning to the barriers of the stock market. And with fewer detention times and reduced attention spans, PSPC is the ultimate form of instant gratification. It allows investors to play a new trend – for example, sports betting or automated house flipping – the second it catches fire in the market without waiting for a young company to first demonstrate a year of breakthrough.

But it’s not just fools rushing around. A lesser-known feature of today’s PSPCs is that investors can opt out, redeem their shares plus interest around a shareholder vote on a proposed target. Investors in normal state-owned companies who sign a deal wish they could get off the ship relatively unscathed before what could be a disastrous deal.

Real estate technology company Opendoor, headed by Eric Wu, went public through a SPAC merger last month.


Photo:

David Paul Morris / Bloomberg News

Not that this year has been a good year to bail out: The annualized rate of return of all PSPCs in 2020 so far is 35%, according to SPACInsider, significantly higher than the 9% return of the S&P 500 to date.

Businesses love PSPCs because they allow them to bypass a long review process and a long investor roadshow. Better yet, they can consolidate an assessment and a result before a transaction is announced on the public market. That certainty will always be attractive to some companies, even in less turbulent times, says Carlos Alvarez, who heads PSPC-related banking services at UBS..

UBS 1.57%

Real estate technology company Opendoor went public via a SPAC merger last month, citing speed to market and the ability to capitalize on healthy housing trends amid Covid-19 as the deciding factors, according to one person familiar with the subject. Venture capital shares of Chamath Palihapitiya’s Social Capital Hedosophia Holdings Corp. II IPOB -4.26%

are up over 75% since PSPC announced Opendoor as its target.

Of course, PSPC is not a free lunch. In a hot market, there is a significant opportunity cost associated with immobilizing capital for a long time. And most PSPC sponsors are very motivated to pull the trigger because they have traditionally been paid based on any deal they execute, not just a winning deal. Their rewards are much better when ordinary investors do well too, of course – or at least see early market gains. But investors have often done wrong by hanging on. Renaissance Capital says that at the end of September, only 31.1% of the 313 PSPC IPOs since 2015 had positive returns, significantly behind traditional IPOs during that time period. Their performance is often worse after a merger closes.

Some of these risks are changing, however. While PSPC investors were expected to vote against a deal to repurchase their shares, the right to repurchase shares is now independent of shareholder voting, giving investors more freedom and allowing more transactions to go through. In addition, sponsors such as hedge fund manager Bill Ackman are waiving guaranteed fees, opting for warrants exercisable based on performance. And leading banks such as Goldman Sachs GS -1.15%

now subscribe to SPAC agreements. PSPCs also fill a void: Thanks in part to the growth of private equity over the past few years, there are far fewer SOEs today than 20 years ago.

PSPCs are experiencing a golden age that will fade as speculative appetite does, but they are unlikely to disappear altogether – they are too useful for everyone involved.

Write to Laura Forman at laura.forman@wsj.com

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