Blank-Check Companies Dominate the IPO Market

Investing in a Mystery

Special-purpose acquisition companies (SPACs), also called blank-check companies, are having a moment. These companies raise money through an initial public offering and then search for a place to invest the funds, typically over the course of about two years. Shareholders must approve these investments.

During a volatile 2020, blank-check companies have raised roughly $6.5 billion. In April, these companies claimed 80% of all funds raised for IPOs in the US. This is striking, given that on average over the past ten years, they have only made up 9% of the IPO market.

Blank-check companies do not have set business plans and don’t initially generate revenue. However, their recent success shows that investors are betting that once the coronavirus dust clears, there will be profitable deals to snap up.

Looking Back

Though the IPO market was sluggish last month, SPACs were dominant—$2.2 billion of $2.6 billion raised for IPOs went to blank-check companies.

Two SPACs from Social Capital Hedosophia Holdings that went public during the pandemic raised more than $1 billion combined to buy tech companies. Social Capital Hedosophia’s initial SPAC invested heavily in Virgin Galactic (SPCE), allowing the space-travel company to go public under its umbrella in 2019. Virgin Galactic has been trading about 60% above its listing last October.

Despite these success stories, on the whole, SPACs have not historically performed as well as traditional IPOs. SPACs tend to trail the broader market by about 3% each year for their first three years post-IPO, according to data from 2010 to 2017. Traditional IPOs, on the other hand, often perform better than the rest of the market during their early years.

DraftKings Defies the Odds

DraftKings (DKNG), the online sports betting platform, made its public debut through a blank-check company called Diamond Eagle Acquisition Corp. in April. After originally announcing the merger late last year, Diamond Eagle stock jumped from $10 per share to $18.69. Then on April 24, DraftKings’ first day trading on the Nasdaq, shares leapt by 10.1% and pushed the company’s valuation up to about $6.3 billion.

The IPO was announced in December, and Diamond Eagle raised the money to acquire both DraftKings and SBTech, the online gambling platform it integrated into the company in 2019. This laid the groundwork for a successful IPO, despite a turbulent market and in light of the fact that most major sports have been on hold.

As the US attempts to reopen portions of the economy, the IPO market has shown signs of life. As a result, it’s hard to tell whether or not there will be as much capital flowing to blank-check vehicles moving forward. One traditional IPO to keep an eye on could be for Albertsons, a grocery company that operates stores across 34 states and the District of Columbia.

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