What area of the PropTech sector would you invest in if given a blank check? That’s what investors are asking themselves at CBRE, Cushman & Wakefield, Toll Brothers, Tishman Speyer and other major commercial real estate players that have pooled hundreds of millions of dollars to invest in the space. What are the funds that they invested in planning on doing with the money? Not knowing is part of the magic. Special Purpose Acquisition Companies (SPACs) are the hottest new investment vehicle, how they will change the PropTech sector is just beginning.
SPACs are like reverse Initial Public Offerings. In a traditional IPO, a company announces it will seek public investors, discloses operations and exchanges shares for money. SPACs, on the other hand, put the money together first. By law, investors cannot specify what they plan on acquiring. Once the money is pooled, the SPAC goes public as a shell company, where it will begin searching for other “real” companies that want to go public. Then the SPAC shell buys these companies outright, merging together as a new publicly traded company. Instead of a company looking for investors, a SPAC is investors looking for a company. SPACs offer a quicker time to market by reducing the need for some regulatory disclosure. As a shell company, the SPAC doesn’t have much of anything to report to the SEC, shortening the process. For the real company, a one-time deal also saves time by removing the need for investor roadshows and high-profile IPOs. Assurance from investors in an outright deal is less risky than relying on the market for an IPO. In an uncertain market, speed and reduced risk are crucial advantages.
The unconventional investment vehicle fell out of vogue after similar investment strategies were used for ill-gotten gains during the 1980s. A federal law was passed to reign them in, known as Rule 419, which requires the investment fund money to be put in escrow so no trading occurs before the completion of an acquisition. Since then, the blank check method has been reinvented as the SPAC, now the hottest form of investment on Wall Street. With the stock market at an all-time high, SPACs have shot through the roof, quadrupling since last year
“I’ve probably done, you know, one or two SPAC combinations a year for the last five years—until this year,” Sarah Morgan, a lawyer with the large energy-focused law firm Vinson & Elkins, told NPR. “This year the market just exploded. [SPACs] are over 50 percent of my practice this year.”
Last year 248 SPACs raised $83 billion to invest, according to research from SPAC Insider. Just 11 days into 2021, 28 SPACs have raised nearly $7 billion. It’s important to remember that just because the money is raised, doesn’t mean it’s spent. The nature of SPACs are speculative, they look for companies to purchase but don’t always find them. When they fail to find the right deal, the SPAC dissolves and investment funds are returned to stakeholders.
SPACs will pour rocket fuel on the fire already created by massive growth in the PropTech industry. Before the pandemic, the property technology sector was riding record highs. A staggering $31.6 billion in venture capital was invested in PropTech in 2019 alone, as highlighted in CREtech’s 2019 End-Year Report. It’s still too early for 2020’s numbers, but anecdotal evidence indicates the PropTech industry hasn’t been immune from pandemic stress. U.S. venture equity funding of PropTech firms year-to-date through last August totaled $2.7 billion, down 47 percent compared to the same period in 2019. After the initial panic wore off, stakeholders began to look to technology for solutions to the slew of new problems owners and managers faced. PropTech companies with a market-ready solution were bolstered. Many who had teams built up but haven’t worked out a go-to-market strategy, suffered. A down year has stunted or killed off many PropTech VCs.
As more money pours into PropTech investment in the form of blank check acquisition companies, the number of companies to invest in is shrinking. The truth is the supply of market-ready PropTech investments does not equal the enormous demand. SPACs are likely to speed up the investment cycle, taking companies public earlier then they normally would have. That means late-stage investment in PropTech ventures will become rarer. Competition between investors for the limited supply of deals will see earlier and larger investments.
“In 2021, we will start to see a clear divide between those who successfully adjust to the times, including through adoption of PropTech, and those that are left behind. That creates a massive opportunity for investment in 2021,” Doug Jamieson, corporate managing director at real estate services firm Savills, told NREI Online.
PropTech investment may have taken a brief pause in 2020, but it will come roaring back in 2021, powered by SPACs. PropTech is just one sector riding the SPAC tsunami. The automotive, tech, fintech, cryptocurrency, and energy industries are all part of the SPAC boom, earning big banks billions in fees, regardless of deals done. “There’s a growing acceptance of this way of going public,” Carlos Alvarez, head of permanent capital solutions at UBS, the sixth-largest SPAC underwriter last year, told the Wall Street Journal.
The PropTech industry will need to exercise caution with SPACs, though. Despite their rapidly growing popularity, SPACs still do not have a high success rate. Of 223 SPAC IPOs conducted from the start of 2015 through July 2020, just 89 have completed mergers and taken a company public. The 89 completed deals delivered an average loss of 18.8 percent. That compares with the average after-market return from traditional IPOs of 37.2 percent since 2015. Just 26 of the 89 completed SPAC deals since 2015 have had positive returns, according to Market Watch.
The concept of blank checks has always been a riskier business, promising unlimited funds and little accountability. The speed, lack of transparency and huge amount of money being thrown around SPACs will require a stiff upper lip from investors looking to seize the new opportunity presented by the reinvented investment vehicle. The largest players in commercial real estate will attempt to prove they can ride the SPAC wave; hopefully, they don’t get left adrift if and when the tide goes out.