Will SPACs Continue to Outpace IPOs Over the Coming Decade?

The special purpose acquisition company, or SPAC, came into its own in 2020. The so-called "blank-check company" exists with the sole purpose of conducting an initial public offering (IPO). It then uses the funds raised from the IPO to acquire another business. Last year, the amount of capital raised by SPACs totaled roughly $80 billion, outpacing the $67 billion raised from traditional IPOs. 

On this clip from Motley Fool Live recorded on Feb. 12, "The Wrap" host Jason Hall and Fool.com contributors Danny Vena and Jamal Carnette discuss the potential for the SPAC to become the dominant way companies go public.

Jason Hall: According to The Wall Street Journal, SPACs, the Special Purpose Acquisition Corporations? That's what it stands for, I believe. So far this year, have generated something like $38 billion dollars in capital already this year. IPOs have generated under $20 billion. That's a lot more. Last year, SPACs outraised IPOs by about $6 billion. So just a little bit more last year.

Here's the question, guys. Is this the threshold of a massive sea-change in the way companies go public? When should I take the over-under, Jamal? SPACs are going to outraise IPOs over the next 10 years.

Jamal Carnette: I'm taking the over, and I don't think even think it's going to be particularly close. First of all, if you're looking at movement, you can tell by now. Just the pure amount of mania that's going on in the space with. I believe you have even former administration officials, celebrities, everybody's doing a SPAC.

I do think this is an opportunity, and I know I'm going to sound like a regulation boo bird here, but I do believe it's an opportunity, or we should look at how these are allowed to come to market and what are the terms and the marketing that they can have around this SPACs because these loose, undefined rules can really hurt the growth of it in the future. Getting some rules of the road here can really help with the future. But to answer your question, succinctly, not even close. It will be SPACs.

Jason Hall: So you're saying it's going to be IPOs?

Jamal Carnette: [laughs] That's right. IPOs for the win.

Jason Hall: Danny, what do you think? Again, ten years out, SPACs are going to outraise IPOs?

Danny Vena: I'm going to take the over as well. I think SPACs are going to outraise IPOs. I'm going to go with Jamal here.

I want to say though, there's always the opportunity that something could change over the next few years. But I liked his use of the word "mania" because I think that there's quite a bit of that going on. If you look at the fact that when SPACs hit the market, the valuations are already ridiculous at the offering price. Then you look at the first-day [stock price] jumps. The lower ones are jumping 20%. The ones that are even more in-demand, they triple. They go up a 100% or 200% in a day. It's ridiculous.

I think we've got a lot of novice investors in the market. I think that's drumming up a lot of interest, but I also think that this is another way for folks to bring a company to market where they don't have to rely so much on the call that the investment bank is making on how they should price their shares, so they're hoping that they're going to leave less money on the table.

Thus far, that's not what has happened. They think they're smarter than the average bear, but then they turnaround and the stock doubles the first day out of the gate.

Yes, I think there's a lot of momentum behind SPACs right now, I read the other day that Colin Kaepernick is going to put together an ESG [environmental, social, and corporate governance] SPAC and other celebrities, so I think this is going to be the big trend at least, for the next couple of years. A decade down the road, I think SPACs are going to be more universally used than they are now.

Jason Hall: I was just want to start a SPAC to remodel my kitchen. Can I do that? If I identify that as the business purpose, I think the SEC [Securities and Exchange Commission] would let me do that, I think. I don't know if anybody will invest in it, but it's worth trying.

Danny Vena: I still like Tim Sparks' idea of doing the "The Wrap" SPAC. [laughs]

Jason Hall: That could have legs. We have some great ideas here. Execution's not always the best, but we have some great ideas.

But I guess that's part of the story of SPACs. Great ideas, execution is questionable? I'm curious to see what happens. I'm not sure if I want to say, "Yes, SPACs are going to outraise IPOs or not." The reason actually ties to the next thing we're going to talk about here is that you still see the big companies with proven revenues, with real cash flows, they IPO? I think Roblox is going to buck the trend, and they're going to direct list.

Jamal Carnette: It makes sense. If you're an established company that's going to come to market at a very high market capitalization, you want that support from the investment banks. You would want the add-on features like somebody is going to provide you stock coverage. Somebody is going to provide you price support for the first couple of days, which it really helped Facebook (META -10.56%) on that first day if you guys remember, a long time ago.

So what I think you're going to see is a lot of smaller companies come via SPAC. When I say smaller, under $10 billion perhaps maybe even more, but then those big, large ones that come to market are probably going to continue to go via IPO. Sorry, go ahead.

Jason Hall: I was thinking what it's going to come down to is investor appetite. Just looking and thinking, for instance, the EV space, electric vehicles, hydrogen vehicles, all of that space, there has been tens and tens and tens of billions of dollars invested in this space, into so many pre-revenue companies that it's inevitable that there's going to be a lot of money that gets burned.

Danny Vena: Speculative.

Jason Hall: What's that? That's the thing. There's so much of it that's speculative. I think at the end of the day, at what point does investor appetite change enough to move beyond the SPACs where even if maybe we see more companies go public via SPAC than we do IPO, but the IPO companies are just raising a larger number of dollars. I think that's what we're going to see, some of the shift over time, so we'll see how it plays out.