IPOs and SPACs

Commentary: IPOs and SPACs

25 Mar 2022

Initial Public Offerings (IPOs) allow private companies to issue shares to the public and raise capital from public market investors. The process is highly regulated and capital-intensive. In recent years, investor demand for newly issued shares has driven sky-high valuations, making going public attractive for founders as well as early investors seeking an exit. Last year was a record one for IPOs, many of which are late-stage high-growth firms e.g., Robinhood, Rivian, Coinbase, and Coupang. In total, firms raised over $150 billion in proceeds in 2021.

In crush for time

Recently, more firms have chosen to go public via reverse mergers with special purpose acquisition companies or “SPACs”. These are dormant blank check companies that exist solely on paper, raising capital from public investors for the purpose of merging with a yet-to-be-decided private firm in an effort to bring it to market. This unconventional approach, which picked up pace in 2020, is much faster than the traditional process with regards to regulatory hurdles and also less expensive. However, SPAC mergers come with fewer operational and financial disclosures. Of the 1,026 public listings last year, about 60% percent were via SPACs, and those listings raised over $160 billion in 2021 alone.

For the record

Regardless of how companies come to the public market, investing in recently-public firms has generally not been accretive for investors in the long run. While big “first-day pop” pulls investors, the fact is that most IPOs underperform. Analysis by Prof. Jay Ritter and team, dating back from the 1980s through 2019, shows that the average 3-year market-adjusted return of IPOs was about -16%. And WSJ report highlights that 2021 was no different. In short, excess optimism/greed by market participants generally drives overvaluations in the short term, only for the stocks to cool off later. Not to pick on one firm but a recent example is EV Maker, Rivian, which went public in early Nov 2021, raising $12 billion at an $86 billion valuation—more than Ford Motors—despite having less than $1 million in projected sales and over $1 billion in losses. Today, under six months later, it trades at an over 60% discount to its IPO price. For us, we have historically shied away from investing in new issues for key reasons:

  • Lack of profitability: A recent NASDAQ study found that today about 80% of recent IPOs were by unprofitable firms, compared to 20% in the 1980s. Notably, today’s ratio is reminiscent of the dot-com era. Not a good sign if you are looking for long-term returns.


  • Lack of track record: Although the median age of firms at the time of IPO is a little over a decade (11 years to be exact), most firms only disclose the required three years of audited financial statements in their S-1 filings. For us, this is typically insufficient to assess the operational performance and/or durability of the business moat for most firms.


  • Hype train & investor exuberance: As noted above, researchers have found that IPOs tend to underperform over a 3-year horizon. The fact that this is systemic reflects investor behavior consistent with early hype. For instance, in their S-1, Rivian prominently highlighted Amazon’s initial pre-order of 100K commercial vehicles as well as over 48,000 consumer preorders; just enough to match the 150K estimated production capacity. Whether or not this materializes is irrelevant. The messaging was clear: a prospect of strong demand!


To us, “A bird in the hand is worth two in the bush”. And in light of clear evidence that most IPOs underperform in the long run, we generally shy away from hot-new listings—many of which are unprofitable hype trains. Instead, we focus on a collection of businesses with a proven track record of operational excellence.

The Xantos Team

Xantos Labs ("Xantos", "XL") is an SEC-registered investment adviser.

The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. The views expressed here are those of the authors and not necessarily those of Xantos. Charts and graphs provided herein are for illustrative purposes only. Nothing contained herein constitutes investment, legal, tax, or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. XL and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this document.

Diversification does not eliminate the risk of experiencing investment loss. Past performance is not a guarantee of future performance.

The information in this document may contain projections or other forward-looking statements regarding future events, targets, forecasts, or expectations regarding the strategies described herein and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and they may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight. Hypothetical performance results are presented for illustrative purposes only.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor. The factual information set forth herein has been obtained or derived from sources believed by the author and XL to be reliable, but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision.

Xantos may provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which xantoslabs.com has no control. In no event will XL be responsible for any information or content within the linked sites or your use of the linked sites.

Ready to get started?

app_store google_play
xantos-logo Get the app