As the industry continues to mature, a new path for private companies to go public has suddenly arrived with SPACs. This go-public vehicle gives companies speed, certainty and simplicity as they seek to go public. Opendoor is poised to begin trading on the New York Stock Exchange in this way, and others will likely follow.
An emerging financing scheme hit home in the residential real estate brokerage industry when news of Opendoor’s pending IPO through the special acquisition company (SPAC) Social Capital Hedosophia II emerged in September.
SPACs provide an increasingly popular opportunity for private companies to begin trading publicly without some of the burden, restrictions and long timelines that accompany a traditional initial public offering (IPO).
The runup to an IPO usually includes the filing of an S-1 financial statement with months of financial disclosures, setting initial share pricing and a long roadshow. Companies can also go public via a direct listing in which a company sells existing shares directly to the public, but this route has not been common in real estate.
| SPAC Pros and Cons (for a private company looking to go public) Pros: SpeedCertaintyPrice-discoveryNegotiate based on projectionsPotential for a valuable group of advisors through the SPAC Cons: Lack of publicity that comes with a long build up to an IPOThe fees charged by the SPAC |
A merger with a public SPAC, also known as a “blank check company,” short-circuits the long IPO lead time for private companies looking to go public. SPACs raise money and go public as an empty shell company with the express purpose of acquiring a private company to take public. For its role, the SPAC takes a percentage of the value of the private company and ends up owning a small portion of the public company. In Opendoor’s case, Hedosophia will own 6.6 percent of the public company when and if the merger goes through.
This presents a powerful innovation in the real estate industry that can quickly change its landscape as companies now have a streamlined, simpler go-public strategy at their fingertips.
Already, half of the nation’s 10 largest real estate holding companies are public, and, undoubtedly, a few of the still privately held real estate companies must be exploring this option aggressively.
Nation’s 10 largest real estate holding companies
| Publicly held companies (Rank by 2019 sales volume) | Privately held companies (Rank by 2019 sales volume) |
| Realogy (No. 1) RE/MAX (No. 3) HomeServices of America (No. 4) EXp Realty (No. 7) Redfin (No. 9) | Keller Williams Realty (No. 2) Compass (No. 5) Windermere (No. 6) Weichert Realtors (No. 8) Douglas Elliman (No. 10) |
Source: 2020 Real Estate Almanac
The rise of SPACs
SPACs have been in the investor world for decades, but carried a reputation of use with marginal companies, and prominent real estate firms had not pursued them before. The previous six real estate companies to go public on major exchanges all did so by IPO: Zillow (2011), Trulia (2012), Realogy (2012), RE/MAX (2013), Redfin (2017) and Fathom Realty (2020).
The perception of the SPAC strategy changed in 2019 when the space travel company Virgin Galactic and online betting startup DraftKings – both well-regarded startups – chose to go public via SPACs. Virgin Galactic began trading on the New York Stock Exchange in October 2019 with a market cap of approximately $1 billion while DraftKings began trading on the Nasdaq in April 2020 when the acquisition closed with a market cap of $3 billion.
This immediately legitimized SPACs and they began to proliferate.
As of early November, the number of SPACs have already tripled from the 2019 total, according to SPACInsider. With Opendoor’s blue-chip pedigree, with leadership that includes respected Silicon Valley veteran Keith Rabois as executive chairman and co-founder, and investors that include well-regarded venture capital firms Khosla Ventures, Andreessen Horowitz and SoftBank, its move has further elevated SPACs as an option for respected companies in real estate.
SoftBank, the major investor behind Compass and Opendoor, is reportedly creating its own SPAC. And former Zillow Group CEO Spencer Rascoff, who guided Zillow to its 2011 IPO, raised $350 million with other partners to create a SPAC, Supernova Partners Acquisition Company, that went public on the New York Stock Exchange last month.
Rascoff estimates that half of the roughly 170 SPACs who have raised money are targeting tech companies. His SPAC, Supernova, is targeting a private high-growth tech company worth from $1 to $5 billion, and will own from 2 to 5 percent of the company it eventually chooses.
Takeaway SPACs, of course, differ, and maybe their time as a strategy to take a company public will be short-lived. However, for the residential real estate brokerage industry, whose cycle of consolidation, innovation and corporatization is cresting, this option provides an attractive IPO alternative that a number of real estate companies will consider and maybe take.