The rise of the SPAC and the race to go public

COMMENT The world of proptech is buzzing again. While most industry players are talking about “proptech fatigue”, those with investments in these technology companies are nowhere close to sounding tired. While Covid-19 exposed the real estate industry’s weaknesses, it also created opportunity for some – and most of this opportunity was seen in the public markets. At around this time last year, the world economy was starting to slow down. We had just been introduced to the virus and government intervention flooded the market with stimulus to keep economies afloat. Interest rates took a dive. Private equity investment had come to a standstill and unemployment had started to go up. But at the same time, the publicly traded markets surged to record highs. The world’s billionaires became richer by an additional $1tn. Trading apps like Robinhood became a household name and, true to their name, provided a way for the bearer of the stimulus cheque to  “invest in his favourite brands”. In an environment of no better alternative, the public markets have become a playground of speculative trading where stock valuation has no relation to the actual underlying asset. The stock market started trading only on forward-looking expectations as opposed to fundamentals. To put these numbers in perspective, if you had entered 2020 with an investment in the S&P 500, you would have earned 16% through the pandemic. If you had put your money in Tesla, you would have earned a 740% return. A new risk profile The public markets have changed their risk profile to be closer to that of venture capital. The separation of pricing of a tradable asset from its underlying asset is the textbook definition of a bubble. It was what triggered Black Tuesday, the dotcom bubble and even the subprime crisis. But avoiding all judgment, 2020 was a good year to be a public company. Most savvy investors have seen this cycle a few times. Many have previously sold their holdings in these assets at highs like our current public market conditions and then held a hedge position in preparation for the collapse. But to get these exits, it’s important to be publicly listed. The process of taking a company public is no short-term task. It takes months of planning and underwriting to make a company ready for the expectations and responsibilities of the public markets. This process is even harder for the new-age “unicorns” who find the scrutiny of their valuation and business models an inconvenience to their mission to change the world. The failed IPO of WeWork is a good example of the problem. So to bring assets to the more liquid public markets at speed, an old financial vehicle has been revived: the “blank-cheque company”. These companies, or special purpose acquisition vehicles (SPACs), have been around since the 1990s. They are basically shell companies in which investors advance cash to the sponsors, who then look for an acquisition target in order to add “value” to the shell. In terms of protections for the investors, the money is put in an escrow and there is the right to refund your investment if you disagree with the selection of the target company. The deal has to be done within two years of the SPAC’s birth. SPACs are a really good vehicle for the sponsors. Mostly because the performance that they are rewarded on is not the quality of the acquisition but the very existence of an acquisition. Typically, the sponsor gets a 20% stake in the combined entity as a promote for their success in merger. This value may be negotiated during the process of the merger but irrespective, a mixture of warrants and promote allow the sponsors to create value for themselves, often on the very first day of trading. The investors in the SPAC are also rewarded well during the process of the acquisition. Since the SPAC is already publicly traded, the period between the announcement of an acquisition and the actual acquisition makes for a volatile period of arbitrage. Finally, by the time the acquisition is complete, the company has been moved to a more liquid market where it can either continue to grow or collapse. Rise of the public listing The proptech world has already seen a few companies aiming to go public through this vehicle. Porch.com was listed at the end of 2020 on Nasdaq through the Proptech Acquisition SPAC. Latch recently announced its decision to list through a Tishman Speyer SPAC and WeWork is in talks with two SPACs in order to find an exit in the public markets again. More than $80bn (£58bn) has been raised through blank cheque companies looking to collect multiple companies or find a target company to take to the public markets. Many of the targets of these companies will be venture-backed tech businesses that are limited by the fixed duration of the life of a fund. The companies that are trapped pursuing slow-paced tech, such as electric vehicles, or slow-paced markets, such as the real estate industry, will be best suited to move their risk to the public markets. While the easy route to an IPO sounds enticing to investors and founders, it still merits the question: does the business really hold long-term value for the public markets? At this point, the answer seems to be “that’s not my problem”. Tripty Arya is founder and chief executive of Travtus