Navigating the boom and bust of global SPACs

This paper examines the recent surge and decline in special purpose acquisition companies (SPACs), an alternative public listing option that offers certain companies a potentially faster and more flexible route to public markets. Once a niche market, SPACs became the primary route to going public in 2020-2021, attracting significant investor interest. This analysis begins by reviewing the unique structure of SPACs and their perceived advantages over traditional initial public offerings (IPOs). Using transaction-level data, this paper examines issuance trends and the specific characteristics of global SPACs up to end-2023. It also discusses various concerns surrounding the SPAC process, including inherent information asymmetry, agency costs, and potential conflicts of interest involving SPAC sponsors and underwriters. The paper then analyses the returns associated with SPAC transactions at various stages, shedding light on the risks and differences in returns between different stakeholders. In particular, SPAC sponsors and early investors, primarily hedge funds, enjoy very positive returns. Conversely, end investors, including retail investors, who invest in the companies that go public through SPACs, also known as deSPACs, earn mostly negative returns. Specifically, using a sample of individual US and non-US SPACs from 2016 up to the end of 2023, this paper demonstrates the suboptimal performance of deSPACs for different investment horizons. These concerns about SPACs’ structure and negative outcomes for individual investors have led to increased regulatory scrutiny and contributed to the rapid decline in SPAC activity since 2022. Amid an evolving SPAC market and regulatory framework, this analysis contributes to the ongoing debate on the role and viability of SPACs as an effective tool to raise equity.