Flotations versus blank cheques
Neither route to the stock market covered itself in glory in the recent bull market. But how do returns really stack up?
Spacs are whack and IPOs are the gold standard, the former merely being a route to market for weak companies. That commonly held belief was challenged by the recent biotech bull market, when a wide-open IPO window allowed a flood of developers of dubious quality to list.
Spacs, also known as blank-cheque companies, still have a worse reputation than IPOs, however. Deservedly so, according to an analysis of returns versus IPOs, although developers that listed via the more traditional route have also performed poorly. Both cohorts substantially underperformed the wider market, Evaluate Vantage finds.
The chart below shows the average returns delivered by pure-play drug makers that listed on Nasdaq via either IPO or Spac, to the end of February this year. The comparator chosen was the XBI, a closely followed exchange-traded fund that tracks small biotechs. For a more detailed methodology, see below.
Cut the data almost any way, and negatives emerge. The only exception is the mean return on 2022 IPOs, thanks to incredibly strong performances from Belite Bio in particular, and Nuvectis Pharma.
Perhaps this finding can be explained by a more exacting IPO market last year, when only lower-risk developers were able to float. However, it is also true that these groups have had less time to reach, and potentially miss, important targets, compared with previous years’ cohorts.
It is also worth remembering that considerably more developers list via IPO than via Spac. In 2021, for, example, the relative numbers were 94 and 18.
That year the peak of the bull market was reached, and this cohort of IPOs and Spacs is the worst performing, even against similarly terrible returns on the XBI. This finding surely confirms that investing at the peak of the market rarely ends well.
While this analysis paints ex-Spacs as stocks to avoid, success stories can be found in this group, as detailed in our deep dive into this space. And if all three years are amalgamated the median returns are not that different between IPOs and Spacs, at -69% and -78% respectively. This compares with a 27% fall for the XBI.
Methodology: For IPOs flotation price to close on 28 February 2023 was used to calculate return. For acquired companies the per-share takeout price was used where possible. For reverse merger targets the share price immediately before deal announcement was used.
For Spacs return was calculated from $10, which is the price at which these vehicles float, and where they typically trade until the acquisition of the target company closes.
The average closing price over each year was used to calculate the XBI return, also to 28 February 2023.