Another Peak Alert: The Blank Check "SPACs" Boom Has Just Surpassed 2007

In 2017, stock issuance by SPACs has made a new post-crisis high, surpassing the last peak in 2007 which saw the equity market peak in October of that year prior to the crisis. Before we go any further, we’d better define a "SPAC" just in case you’re unfamiliar with the acronym, although they are also often known as “blank check” companies or “blank check" IPOs. From Investopedia.

A popular type of blank-check company is a special purpose acquisition corporation (SPAC). The founder of a SPAC pools money from investors and he or she may contribute to the SPAC to form a blank-check company with the sole purpose of acquiring another company or companies.

Investors do not have knowledge of how their money will be spent, so they issue blank checks to the SPAC. In turn, the SPAC must receive shareholder approval for all acquisitions and 80% of investor funds must be used in any single deal. If the SPAC fails to find a shareholder-approved deal within two years of creation, it is liquidated and the SPAC's founder loses the investment. Blank-check companies present investors with an alternative similar to private equity.

Here is the Wall Street Journal on the latest iteration of a SPACs boom.

Would you invest in a company that couldn’t tell you what its business was going to be? Some would, in fact they are doing so in record amounts. Blank-check companies, otherwise known as special purpose acquisition companies, or SPACs, are listed companies that raise money from investors to go and buy a company as yet unidentified. The returns to investors can be stellar—but on average they aren’t great. Investing blind looks to be as high-risk as it sounds.

This year, there have been almost $14 billion worth of new listed shares in blank-check companies, a record, outstripping 2007’s $12.3 billion global issuance, and giving it all a peak-of-the-markets feel. Between 2007 and 2017, listings were fewer and issuance averaged less than $3 billion a year.

Equity raised by special purpose acquisition companies

Note: 2017 is year to date; issuance in 2009 was negligible
Source: Dealogic

In terms of peak signals, the primary drivers of the current SPACs boom are euphoric markets and excess liquidity. The WSJ draws the comparison.

Today’s SPAC boom is driven by the same thing as 2007: vast sums of money trying to find a home and any kind of half-decent returns. And private-equity deal makers, who already have more buyout money to invest than at any time in history, are increasingly sponsoring SPACs too, to buy assets that wouldn’t fit the return aims of their private funds.


Firms such as Carlyle , Fortress , Riverstone and TPG have been all behind large deals this year.

Aside from the often illusory lure of high returns (see below), the appeal of investing in a SPACs is a manager or management team with a strong track record. For example, the largest SPAC in 2017 is J2 Acquisition, which raised $1.21 billion. J2 Acquisition is headed by Martin Franklin, which built up the Jarden Corporation through the acquisition of more than 20 consumer businesses. Investors in Jarden made fifty times their initial investment.

The second largest SPAC in 2017 is Silver Run Acquisition Corp. II, which raised $1.035 billion. It boasts the services of former Anadarko CEO, James Hackett.

Money raised by the top five SPACs globally in 2017

Source: Dealogic

The major problem for SPACs right now is twofold, firstly the very high valuations of targets and, secondly, the competition for deals between SPACs, private equity and existing corporate buyers has never been more intense. While not specifying this directly, the WSJ ponders on the varying performance of SPACs.

The performance of blank-check companies vary. Plenty close and hand back investors’ cash by reaching the end of their typical two-to-three-year lifespan without finding a deal. Of nearly 300 SPACs that have listed in the U.S. since 2003, 80 have closed and handed back cash, while the total returns to shareholders for the 151 that have completed a deal up to the end of last week amount to an annualized average of 5.1%, according to specialist website Spacanalytics. That compares to 9.4% for the S&P 500 over the same period. (Another 40 SPACs are looking for their acquisition, while 12 have announced a deal but are yet to complete it).

Milos Vulanovic, a professor at Edhec business school in Paris, who studies SPACs, says on average they perform poorly, but he has found common factors to some that do well. SPACs focused on the shipping industry, for example, happen to have performed particularly well, returning on average 154%. But again, that’s a small sample. Some do very well: Centennial Resource Development , which began as a Riverstone-sponsored SPAC, has delivered total returns of 107% since April 2016. Others do poorly: Freedom Acquisition bought U.S. hedge-fund manager GLG in 2007, but after losing roughly half its value it was taken out three-years later by U.K.-listed Man Group.

In the end, the WSJ almost throws up its hands, lamenting that its nigh on impossible to tell which SPACs will be successful before the fact. It notes that some management teams can do both good deals and bad deals. SPACs, it concludes are a “high risk play” and we wouldn’t disagree. However, given they have also acted as a signal for a market top, they are a far higher risk play than they’ve been for a decade.