Understanding SPAC’s

Author: Daniël Asselbergs
February 8, 2021

The dutch government filed a formal apology last week for the malpractices in the adoption process. Adopted children often look for their parents. One company that offers services to find parents, siblings and other relatives is 23andMe. The company is planning to go public using a SPAC, since this requires less regulatory paperwork, according to The Motley Fool. During this past year we saw a spike in special-purpose acquisition company (SPAC) IPOs. More than $75 billion has been raised across 248 SPAC IPOs in 2020, according to SPACinsider.com. In 2019 we saw that only $13.6 billion was raised across 59 deals. The average size of SPAC IPOs climbed to $334.8 million last year from $230 million in 2019.

What are SPAC’s?

The goal of a special-purpose acquisition company is to raise money from investors, with the purpose to take companies public without going through the traditional IPO process. This investment vehicle allows retail investors to invest in private equity type transactions. The reason that they are known as blank-check companies is because they generally don’t have a merger or acquisition target when they are formed. The creators of these companies will consequently have 1 to 2 years to use the raised money. If no opportunities are found, investors will be paid in full back.

How do they work?

SPAC’s receive money through an initial public offering that sells shares and warrants in a bundled unit usually at $10. Because the blank-check company has no underlying profits or track record investors look at the sponsors. The reputation, network and experience of the backers of the SPAC are thus crucial for the success in raising money. If investors dislike a planned purchase, they get to sell their shares but keep the warrants. That gives them the possibility of an upside even in transactions they opt out of, if a merger goes better than they expected. That combination is seen as making these investment vehicles a safe bet especially during turbulent markets. Once the business combination is completed, the acquisition target becomes a public company.

Are SPAC’s new?

SPAC’s have existed since the beginning of the nineties. For the past 25 years they were seen as untrustworthy investment vehicles. Mostly because they were the last resort if companies wanted to go public. The reason why blank-check companies are popular now has to deal with the fact that the current sponsors are often high profile, seasoned and wealthy investors. Investors such as Bill Ackman, of Pershing Square Capital Management, has charisma which gave him the ability to lure retail investors. These investment vehicles are also popular because the pandemic has caused stock market volatility, making  regular IPOs more risky. 

What are the benefits? 

For companies who want to access the public market, a merger with a SPAC has become a more enticing alternative to a traditional IPO. Blank-check companies are more likely to attract companies that operate in futuristic industries such as electric vehicles. A non-traditional IPO may also be considered appealing to companies, because it is a privately negotiated acquisition with a set price. That set price is also less likely to change in market turmoil. Sponsors get a large part of the total shares outstanding of the resulting company after a merger. Investors like SPAC’s because they have limited downside and yield, due to the combination of shares and warrants bought.

Although SPAC’s are becoming increasingly more popular, they are unlikely to replace the traditional IPO. We do however like that retail investors are given the opportunity to invest in private equity type transactions. The equalisation of professional and retail investors, which can also be seen in the surge in online brokers is however a good move forward.

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