Have we reached peak SPAC?
Biotech’s latest financial trend is the blank-check company, a publicly traded shell created to buy private firms and grant them Nasdaq listings without the trouble of an IPO. The latest one, from Casdin Capital and Corvex Management, is the fifth to launch this summer alone. It's called CM Life Sciences, and it's planning to raise $350 million to fund a future merger.
But considering the remarkable recent success of old-fashioned IPOs, are we sure there’s enough demand for all these blank checks?
To investors, the appeal of special purpose acquisition companies, or SPACs, is that a blue-chip fund like Casdin is likely better at evaluating private companies than the average stock picker looking at IPOs. And to the companies themselves, merging with a SPAC provides a path to the public markets that doesn’t involve hiring bankers and lawyers and spending months making the same pitch.
But each of those cases might be undermined by the current market for biotech companies. This year has already broken the all-time record for IPO proceeds, and the average company has traded up about 30% after its debut. That trend might convince would-be SPAC targets to go public on their own. And if the most promising companies see an IPO as the better path, SPACs might find themselves in a market for lemons, choosing between firms with no other options. That might scare off investors and deflate the SPAC bubble before it can really take off.
But considering the remarkable recent success of old-fashioned IPOs, are we sure there’s enough demand for all these blank checks?
To investors, the appeal of special purpose acquisition companies, or SPACs, is that a blue-chip fund like Casdin is likely better at evaluating private companies than the average stock picker looking at IPOs. And to the companies themselves, merging with a SPAC provides a path to the public markets that doesn’t involve hiring bankers and lawyers and spending months making the same pitch.
But each of those cases might be undermined by the current market for biotech companies. This year has already broken the all-time record for IPO proceeds, and the average company has traded up about 30% after its debut. That trend might convince would-be SPAC targets to go public on their own. And if the most promising companies see an IPO as the better path, SPACs might find themselves in a market for lemons, choosing between firms with no other options. That might scare off investors and deflate the SPAC bubble before it can really take off.
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