Deal Making in 2020 Was All About the SPAC


“I think the SPAC business has become a large and sustained ecosystem,” said Michael Klein, the veteran banker who has since raised a series of SPACs that have struck multibillion-dollar takeovers, including those of the health care services provider MultiPlan and the analytics software company Clarivate.

Some financiers have now made a business of raising SPAC after SPAC. Mr. Klein recently raised $450 million for his fifth Churchill Capital fund. The venture capitalist Chamath Palihapitiya, who took Virgin Galactic public, has raised a series of funds in search of takeover targets.

And deal makers expect the SPAC craze, to date largely an American phenomenon, to go global. Earlier this month, the French billionaire Xavier Niel raised €300 million ($368 million), for a blank-check fund, in what was the biggest market debut in France this year.

What could go wrong?

Popular targets of SPAC deals this year have been electric vehicle companies, some of which have stumbled badly since going public. Goldman Sachs’s strategists noted earlier this week that many SPACs have posted poor returns post-merger relative to the S&P 500 this year. “If weak returns persist, investor appetite for new SPACs may wane,” they wrote, which suggests that attracting investors for new funds could become trickier. The short-seller Carson Block has declared SPACs “the great 2020 money grab.”

The popularity of SPACs may also prove their undoing, advisers cautioned. Goldman’s strategists estimate that 193 blank-check funds are currently sitting on $63 billion in search of takeover targets. This implies potential buying power of some $300 billion, because the typical SPAC merges with a company five times its size, thanks to outside investors who buy into the transaction, according to LUMA Partners.

SPACs generally have two years to find a takeover target, or they are contractually required to return their money to investors. This puts them on the clock, potentially crowding each other out of deals or leading to mergers born of urgency instead of prudence. “A business model that incentivizes promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion,” wrote Mr. Block.

And one of the big drivers for their soaring popularity earlier this year, disappointing I.P.O. performance, may be waning. The enormous run-up in the valuations of Airbnb and DoorDash in their recent I.P.O.s may persuade some companies to return to more traditional ways of going public, leaving SPACs with billions of dollars but fewer targets worth buying.