How many SPACs are enough?
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The explosive growth in the number of SPACs has led many observers to assert that there are currently too many SPACs searching for a merger candidate. Indeed, over the course of 2021, the searching SPACs count increased by 351, a remarkable 152% climb. In the early weeks of 2022, while the growth rate has abated a bit, we still see this count increasing at more than historical levels.
But, does this mean that there are “too many”? Comparing the current count to previous counts doesn’t seem like the most relevant comparison. It seems more important to compare the searching SPAC counts to some measure of the number of private companies that constitute the target universe for these SPACs. Above we plot the number of private held companies valued above $1b across all sectors and geographies. The growth in this private company backlog is dramatically outpacing the growth in the number of searching SPACs. In 2021, the private Unicorn count increased by 906, which is 2.6x the increase in the number of searching SPACs. And the first handful of weeks of 2022 show a continued increase in this backlog, with the private Unicorn count growing 5.1x the increase in the number of searching SPACs.
Clearly, some of these recently minted Unicorns are pre/early revenue stage companies with large, but highly speculative, potential in front of them. If the public markets continue their shift in appetite away from high-growth and high-risk, toward more predictable cash flows then perhaps some of these earlier stage companies will no longer be prospects for the public markets. But, most of these private Unicorns older more mature companies. 64% of the current backlog of 2,917 companies were founded over a decade ago.
Related to this topic, in the coming months, we will see an upswing in the number of SPACs that reach their deadlines without consummating a merger. As the wave of SPACs that started going public in mid 2020 start to reach their deadline dates, many will not attempt to extend. Look for generalists in the tech press to make simplistic blanket statements about SPACs being out of fashion, or there being too many of them. While it is likely there will be SPACs that reach their deadlines and throw in the towel, the reality is: (1) getting a SPAC merger done is hard, and (2) a deal can be many quarters in the making only to fall apart at the eleventh hour, if this happens twice then time becomes very tight. The key empirical fact that cannot be denied is: the number of private companies valued above one billion dollars is growing at a growing rate. While Unicorn status is not a litmus test for public market suitability, it is reasonable proxy to use over the recent past.
