2020 has been one of the craziest market environments in history, and it’s given rise to a “new” sector for us to trade — Special Purpose Acquisition Companies (SPACs).
There’s one theme we’ve witnessed this year, and it could kill the initial public offerings (IPOs) market.
You see, the IPO process has been brutal for some one-beloved unicorns.
It’s no wonder private companies have been looking for alternatives to go public.
Direct listings have been one of the hot alternatives, but SPACs are where it’s at right now.
I mean these are just some of the hot SPACs this year:
- Tortoise Acquisition Corp (SHLL) is up 378% YTD
- Virgin Galactic (SPCE) is up more than 40% YTD
- DraftKings (DKNG) is up more than 280% YTD
- Nikola Corp. (NKLA) is up more than 200% YTD
To be honest with you, I don’t think SPACs are going anywhere — let me show you the trends and what I’m watching specifically.
Can This Be The End Of IPOs?
With SPACs getting a lot of attention and the success of some private companies going public through this unique route, I think we’ll see more action in this “sector”.
That’s why I believe it’s so crucial to look at this space, if you haven’t been doing so already.
You see SPACs are a much simpler alternative to the IPO market.
The way it goes is, the SPAC raises funds from the public markets, then find a company they want to acquire or merge with.
Once the target company is found, shareholders would either redeem their shares at the offering price, or they can get shares in the newly-formed company.
For private companies, this is an extremely attractive route.
They’re far cheaper than a traditional IPO. In other words, it’s less risky for the company. With an IPO, the terms are set after the deal is announced, so companies don’t really know if people will actually want shares of their stock.
With the way COVID-19 has damaged global economies and the way IPO roadshows were held to drum up demand… I think SPACs are here to stay.
I mean there are just so many problems with the IPO process, from the high fees charged by the investment banks to underwrite the IPO to the amount of time it’ll take to go public…
It’s tough for these private companies to raise enough capital to expand, in a relative short timeframe.
Not only that, but early investors aren’t rewarded and are actually constrained by extremely old rules. Company insiders typically have to hold their shares for 180 days after an IPO, but in six months, the stock can trade well below the offering price.
We’ve already seen how hot some of these SPACs have performed (after the merger / acquisition), and when I saw there was a little-known SPAC in my favorite area of the market to trade…
I was ecstatic.
I uncovered a company with 10X potential, and if I play it right… I can capture a large portion of that move.