Speaking before a (remote) assembly of the Economic Club of New York on Tuesday, the CEO of the second-largest stock exchange in the U.S., Nasdaq‘s Adena Friedman said that an upswell of companies coming to market through special purpose acquisition companies (SPACs) rather than through traditional initial public offerings (IPOs) shows no sign of slowing in 2021.
And it’s not just a question of investors chasing returns in a hot market–but a desire for greater control over investment decisions.
Friedman told the Club that Nasdaq hosted 316 IPOs and raised $80 billion in capital through its platform in 2020, the largest number of IPOs in more than 10 years. Of the 316, about 184 involved operating companies going public through the traditional IPO route. The rest were initial public offerings of SPAC’s to raise public funds that are now looking for operating companies to acquire.
Per Friedman, 2020 was an unusually generous year for IPOs and public markets in general. For this, she credited the U.S. government for taking aggressive action early on in the covid crisis, pursuing fiscal stimulus to put more money into the overall economy so that companies could sustain operations and people could better manage their lives. This had the effect of getting more companies and individual investors involved in markets.
The ongoing, ultra-low interest rate environment further enhanced the appeal of capital raising through equity markets, making alternatives less attractive from an investment returns standpoint.
Finally, she said, many companies that were either unaffected or benefited directly from covid disruptions (e.g. tech and biotech firms) found a receptive investor audience in the public markets. This coincided with a particularly robust risk appetite for investors in the second half of the year.
SPAC spells control
As for SPACs, Friedman noted, these investment vehicles have been around for years, but saw a huge resurgence of interest in 2020 that continues apace in 2021. When a SPAC is formed, she explained, a qualified management team, expert in a given field or industry, joins forces with investors to raise capital into a corporate vehicle that does not (at its inception) have any assets. After the capital raise, the management team is obligated within 12-24 months to populate that company with an operating business that uses the SPAC to enter the public markets.
Why would a company want to go public that way? Friedman explains that while being acquired by a SPAC isn’t easier, it can be faster. Second, company founders and/or investors who sell to a SPAC enjoy a degree of price security, eliminating one big unknown (offering price) in any IPO. They also gain a qualified group of investors or managers who can help them as a public company through the management of the SPAC.
For investors, Friedman said the appeal of SPACs reflects a desire for control among investors. Besides the potential for greater returns in a publicly traded investment, investors vote on whatever acquisition a SPAC makes. The SPAC itself is liquid, so (under normal market conditions), investors can sell their shares even before a deal is reached. If they don’t support the proposed acquisition, they can either vote down the deal or sell their shares.
Asked whether the froth around SPACs compared to the “go-go” 1990s, when Internet stocks were swept in a bubble that became quickly synonymous with the Nasdaq exchange itself, Friedman said investor protections (such as Regulation Fair Disclosure, popularly known as Reg FD) have advanced significantly in the decades since the dot-com crash.
“It was the promise of the future back then [in the 1990’s], but the reality of the companies wasn’t there,” Friedman said. “[By contrast], operating companies going public are good companies with solid financials. The great thing about public markets is that you can invest in highly risky stocks or not very risky stocks, so you can choose your risk tolerance. And disclosure regulations are very robust in the public markets.”
She noted that with SPACs, in particular, investors are protected in multiple ways.
First, once they invest in the shell (the SPAC itself), investors can sell at their own discretion if they need or want to take their money out. Second, the fund operates with a defined period of time in which to populate the SPAC (money is returned to unit holders if the SPAC fails to make an acquisition). Third, investors get to vote on the company and thereby exercise more control over the fund’s decision making. And finally, she noted, SPAC management teams are increasingly being compensated through the performance of the operating company, suggesting an emerging alignment of interests between management and SPAC investors.
Friedman addressed the Economic Club one week ahead of Nasdaq’s 50th anniversary, decades that have seen the exchange evolve from a single market site into one of the largest equities markets in world, the single largest options marketplace, and owner of exchanges in the Nordic countries and across Europe.
In recent years, Nasdaq has grown its business reach into technology services, which it uses to power its own operations and also sells to 130 markets around the world, with market surveillance technology licensed to 50 other exchanges, 12 regulators and a host of broker-dealers. The company also has $380 billion in AUM tied to indexes that it manages, and scaled data analysis platforms that are provided to the investment management community.
“We are a bigger and broader player than our roots,” she said.