Goldman says the SPAC boom will continue and found a way to spot ones that may outperform

Published Mon, Dec 14 20209:17 AM EST

(This story is for CNBC Pro subscribers only.) The historic SPAC boom in 2020 is more than just a fad, Goldman Sachs said. For investors wanting to cash in on the red-hot market, the firm said it identified a key element in winning blank-check deals. Special purpose acquisition companies are an investment vehicle that goes public without having a real business. The goal is to raise funds to finance a merger or acquisition typically within two years. Funds raised via such blank-check deals have totaled a record $70 billion this year, a remarkable fivefold increase from last year, according to Goldman. The total of 206 SPAC deals this year account for 52% of the IPO capital raised in the U.S. in 2020, the bank said. "We expect a high level of SPAC activity will continue into 2021," David Kostin, Goldman's head of chief U.S. equity strategy, said in a note. "Increased retail trading activity has also boosted interest in early-stage SPAC targets. SPACs have low opportunity cost for investors when policy rates are near zero." This year's head-turning growth came amid heightened market volatility caused by the unprecedented pandemic. Meanwhile, low-rate environment has made yield-hunting investors more willing to try their luck with blank-check deals that could sometimes pay off handsomely. Involvement from high-profile investors including hedge fund billionaire Bill Ackman also brought more hype to this alternative vehicle. However, SPACs that completed acquisitions tend to underperform the broader market and returns are all over the place, Goldman found. During the one-month, three-month and six-month periods following the merger announcement, the average SPAC lagged the S & P 500 by 18 percentage point, 6 percentage points and 16 percentage points, respectively, according to Goldman. "Weak returns represent one headwind to future SPAC issuance," Kostin said. "The samples are small and the ranges of outcomes are wide ... If weak returns persist, investor appetite for new SPACs may wane." The bank found that SPACs with this one attribute tend to buck the downtrend — additional financings through private investments in public equity (PIPEs) or private placements. Some blank-check deals are able to attract private backers as initial investors on similar terms before their IPOs. "The ability of a SPAC to raise additional capital through a PIPE or private placement at the time of a deal closing sends an important signal to investors," Kostin said. "SPACs without PIPEs or private placements have dramatically underperformed in 2020." Of the 36 post-merger SPAC deals, six did not raise incremental capital and they have lagged the S & P 500 by 42 percentage points since the deal closure, according to Goldman. When these non-PIPE SPACs are excluded, this year's SPACs posted 3-month, and 6-month excess returns following their mergers of 1 percentage points and 21 percentage points, respectively, Goldman said.

The Wall Street Bull (The Charging Bull) is seen during Covid-19 pandemic in New York, on May 26, 2020.

Tayfun Coskun | Anadolu Agency via Getty Images

(This story is for CNBC Pro subscribers only.)

The historic SPAC boom in 2020 is more than just a fad, Goldman Sachs said. For investors wanting to cash in on the red-hot market, the firm said it identified a key element in winning blank-check deals.

Special purpose acquisition companies are an investment vehicle that goes public without having a real business. The goal is to raise funds to finance a merger or acquisition typically within two years.

Funds raised via such blank-check deals have totaled a record $70 billion this year, a remarkable fivefold increase from last year, according to Goldman. The total of 206 SPAC deals this year account for 52% of the IPO capital raised in the U.S. in 2020, the bank said.

"We expect a high level of SPAC activity will continue into 2021," David Kostin, Goldman's head of chief U.S. equity strategy, said in a note. "Increased retail trading activity has also boosted interest in early-stage SPAC targets. SPACs have low opportunity cost for investors when policy rates are near zero."