By: Claire Travis
May 24, 2021
letter to investors
At Navigation Capital, we often quip that we were the crazy people screaming about SPACs for years before they captured the national zeitgeist, so you may be wondering what we think about what has occurred in the SPAC market over the last year. Truth be told, even we could not have predicted the level of noise around SPACs that would reverberate in business journalism and across the markets for the past several months.
For most of the past year, we have been heads-down, building our team, partnering with first-class operators, and sourcing a pipeline of high-quality deals to launch into the public markets. Now, with 8 funded SPACs in our public portfolio, a mature pipeline of 14 additional in 2021, and a full-time team of 15, we think it’s time you hear from us directly. Many of you have heard our perspective on the market one-on-one, and we thank you for indulging our SPAC talks.
We hope this overview provides some clarity on the current SPAC market and sparks some positive SPAC conversations for you.
As SPAC activity took off in 2020, numerous sponsors rushed into the SPAC game, with many pushing listings without the in-house expertise to drive the SPAC process effectively and without strong management teams working with sound investment theses.
Although created in 1992, SPACs garnered newfound attention in the spring of 2020 as investors realized the potential for outsized returns and substantial downside protection inherent to the SPAC product amid market challenges brought on by the COVID-19 pandemic. This massive uptick in SPAC issuance throughout the year and into 2021 was a significant aberration for the product. Prior to 2021, we saw most SPACs trade below the $10 net asset value (NAV), as IPO investors would maintain warrants and sell shares, as needed, to improve liquidity. As SPACs continued to capture headlines, we started to see all publicly-listed U.S. SPACs trading above NAV by the third week of January 2021, regardless of whether the SPAC had announced a deal or not.
As SPAC activity took off in 2020, numerous sponsors rushed into the SPAC game, with many pushing listings without the in-house expertise to drive the SPAC process effectively and without strong management teams working with sound investment theses. Some of the SPAC craze was fueled by non-operators with big check books, even though September 2020 McKinsey & Company research noted that operator-led SPACs tend to trade about 10 percent higher than their sector index and at a 40% premium to other SPACs. Many of these lower-quality SPACs are still seeking an acquisition target which means inexperienced and desperate sponsors will be incentivized to do deals that are overpriced, ill-prepared for the public markets…or both.
The April 2021 SEC announcement that SPACs treat warrants as liabilities rather than equity has substantially slowed the pace of SPAC issuances in the second quarter of 2021. We believe this latest SEC announcement is a healthy correction that will improve overall performance of SPACs and filter out poor sponsors just as other SEC guidance and rule changes have in the past. We believe that the SEC, in lockstep with other federal institutions, values the SPAC process and the liquidity that SPACs have brought to the public market and showed good judgement to cool the market down in the short term.
We created our SPAC Fund believing that SPACs are an efficient tool to put equity on company balance sheets and that backing first-class CEOs with meaningful operating experience is the best pathway to SPAC success. We are aligned with underwriters who have come to believe that the SPAC process has too often been misused as a substitute for VC fundraising and that the SPAC approach should be limited to acquisitions of companies that are ready to become public. This philosophy is consistent with Navigation Capital’s approach and is demonstrated throughout our portfolio and committed SPAC pipeline.
We expect SPACs to remain attractive for high-growth companies as an efficient pathway to the public markets, and that there will continue to be a place for SPAC transactions in the future. Even now, SPAC deals continue to get done, with Goldman Sachs-backed Big Sky Growth Partners pricing at $300 million in early May and Bill Gates-backed Ginkgo Bioworks announcing a $15 billion merger with Soaring Eagle Acquisition Corp in mid-May. Both SPACs are led by experienced operators: Big Sky by Mark Vadon (co-founder of both Zulily and Blue Nile and former board chairman of Chewy) and Soaring Eagle by serial SPAC sponsor and former MGM CEO Harry Sloan.
The evolution of the SPAC product and market over the last year does not fundamentally change our strategies or impact the potential economics in our portfolio. Like all SPAC sponsors, we are in the process of re-issuing financials for our portfolio to comply with the SEC guidelines, slightly delaying a few IPOs but otherwise not significantly impacting our portfolio companies. We are in consistent communication with our legal and accounting teams to understand the guidance better and will continue to evolve our perspective as we learn more.
Thank you for joining us on our SPAC Fund journey thus far. We look forward to providing you with additional updates on our activities and portfolio soon, so be sure to join our newsletter list below to stay up to date.
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