American Consequences - June 2021

much better than ever before and represents some of the top investors and management teams in the world. Availability of Investments When I began my career on Wall Street, many small and mid-tier investment banks like Alex Brown, Hambrecht & Quist, Montgomery Securities, and others existed. These firms specialized in taking small-cap companies public. Larger brokerage firms and banks eventually bought and absorbed every one of them. Today, big banks like Goldman have no interest in small deals. This makes sense – those deals won’t move the needle for a blue- chip investment bank that generates nearly $40 billion in annual revenues... But it leaves a big hole for smaller companies to raise capital and go public.

the IPO market to sell shares and generate profits for their investors. With the decline in smaller IPOs, this path is becoming more difficult for most companies looking to go public. Instead, private-equity firms are increasingly turning to SPACs as a way to monetize their investments and send the companies in their portfolio to their next growth phase. Lack of Investor Knowledge While SPACs have existed for decades, their popularity has only picked in the past 10 years. This means that the majority of investors lack a deep knowledge of the SPAC market. This is true on Wall Street, but especially true for retail investors. SPACs are also uniquely challenging from a research perspective. When a SPAC initially goes public, there is no financial information available as to what the SPAC is going to (or might) eventually invest in. No research is available for investors to make decisions about the investment. When the SPAC announces the investment, it releases a great deal of information, including historical financials and future projections. And because SPACs go to market much quicker than IPOs, investment banks have a relatively short time frame to produce said research. They’ll eventually cover the stocks, but there’s a window of time where a dearth of information exists. Given the complexity of the structure and the process, many opportunities emerge during this time.



Additionally, we’ve seen an explosion in private-equity investing like never before. Private-equity and venture-capital assets have grown more than 10-fold over the past decade. Many of these firms see great opportunities in smaller and mid-sized firms, but they also have limits on how long they can hold their investments. Historically, they would go to The average SPAC is sitting on hundreds of millions of dollars of uninvested capital that it can now look to deploy, and these experienced investors will likely be able to deploy that capital with great returns.


June 2021

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