Yahoo Finance’s Myles Udland breaks down how the SPAC boom continues to accelerate in 2021.

Video Transcript

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JULIE HYMAN: We got stocks dipping a little bit here as we're coming on 10 minutes after the opening bell here this morning. Late last year, as Myles pointed out in this morning's Morning Brief, David Kostin dubbed this last year "the year of the SPAC." But maybe this year is the real year of the SPAC. And he put on some numbers around what we have seen. Through February 26, 175 SPACs sponsors have debuted. They've raised $56 billion. And it's just been incredible, that we've talked about anecdotally.

But to hear those actual numbers makes it seem even more incredible. Something that also really caught my eye yesterday, Myles, was Bloomberg's reporting and citing a paper that came out actually in 2016, calling SPACs the "poor man's private equity funds." So it's perhaps not surprising in this environment that seems to be prioritizing democratization of equity markets, right? That a product like this would prove to be so, so popular.

MYLES UDLAND: Well, I mean that is, I do not see that. But it's worth discussing in the context of the current SPACs boom. The SPAC structure is not new, so that's, I think, the first thing that maybe people forget. The SPAC structure has been around for a long time. And it's typically used, or has been used, for distressed situations because the sponsor, so the company that has gone public via SPAC then acquiring a different company, the sponsor takes a larger share of the business typically in a SPAC transaction. And so if you are a flailing business, you are happy to give away 20%, 30%, 40% of your equity to someone who will save you.

So there is the private equity component to it. But the things that stood out to me in that Goldman report, we just had the one graphic up of the size of the SPAC deal is now up almost 4x from where it was on average during the last decade. It's also the multiple that is being applied here.

When you looked at what was happening in the rich man's private equity market, Julie, you saw multiples for transactions trend from the four to six range. And then we started getting up towards seven and eight, and the apple cart upset a bit with that rate hike in 2018. But really somewhere between, let's call it 7 and 10 times EBITDA usually, for a PE, a go private type transaction, that's generally the going rate.

Now the SPAC is already up to seven times. So it's basically in the same ballpark. And so the opportunity, the headline here, $700 billion market, all we're doing is taking the number here on the right side of this chart, the $103 billion worth of SPAC capital looking for a deal, and multiplying that by seven, because on average, these businesses or these ventures will pay seven times EBITDA for whatever business they end up taking public via SPAC. That's about double the premium, double the multiple, that was paid during the last cycle. And so all those dynamics are set up for a very strange situation.

And I think, I don't really know how you would go about even doing this math. But at a certain point, the math here is kind of breaking down. Are there $700 billion worth of companies that are worth acquiring at seven times EBITDA to thus justify the amount of capital that is sitting in the market right now with this kind of return expectation? I think that's really the challenge right now for this back market. Though, I don't see any signs of this kind of abating.

BRIAN SOZZO: And Myles, it really raises the other point too, probably a lot of these companies are going to come to market, most people have never even heard of them, which raises the risk profile putting money to work in some of these new names. Look, we just had Danny Meyer, Shake Shack co-founder, last week. He just launched new SPAC. He's looking for his company. I don't think he has a target yet. So it's unclear what they find. But ultimately, you're gonna have a lot of companies start coming to market over the next three to six months that nobody even heard of. Probably chances are they are pre-revenue.

There are a lot of losses. And they may not have any profits or sales for the next five years. So it could really lead to some risky behavior.

MYLES UDLAND: Yeah, and I think something that didn't get into in the article and we can do it another time is just the cash management aspect of the SPAC and why people set up the vehicle at all, because you actually don't have to do anything with the money and you'll make a little bit of return.

JULIE HYMAN: And finally, I just wanted to briefly say, I'll be interested in a few years to see sort of the academic research on where these companies that came public through SPACs did it in their life cycle compared to a company that came public through an IPO, say, and what then the public performance was and the public life of the company was on a comparative basis. If indeed these facts are sort of bringing these companies public before they're ready, what then are the implications for their business going forward?