SPACs: Wall Street’s Hottest Trend or New Norm of Going Public
9 March, 2021Last year was an unprecedented year for SPACs. In 2020, SPACs raised $82 billion, a figure greater than all previous years combined and representing nearly half of all capital raised in U.S. listed initial public offerings (IPOs). And, the momentum continues to grow in 2021, as evidenced by 225 SPACs raising roughly $71 billion already this year—a figure that accounts for more than 70% of all public stock sales and putting it on track to shatter last year’s record.
What is a SPAC?
A special purpose acquisition company (SPAC), sometimes known as a blank check company, is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, or companies, thus making that company public without going through the rigors of the traditional initial public offering (IPO) process.
A SPAC has no commercial operations—it makes no products and does not sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO.
Usually, a SPAC is created or sponsored by a team of institutional investors—Wall Street professionals from the world of private equity or hedge funds.
Although SPACs have been around for decades, in recent years they have seen a surge in popularity. Even high-profile CEOs like Richard Branson have jumped on the bandwagon and formed their own SPACs.
SPAC Risks
With large institutional investors and other billionaire backers launching SPACs more frequently, it’s unlikely that the trend will diminish anytime soon. However, there are risks associated with SPACs, both for the investor and the target company.
- Target companies run the risk of having their acquisition rejected by SPAC shareholders.
- SPAC investors are essentially going blindly into the investment because the people buying into the IPO do not know what the eventual acquisition target company will be. Institutional investors with proven track records manage SPACs, so the idea is that they can more easily convince people to invest in the unknown. That’s also why a SPAC is often referred to as a “blank check company.”
- While the SPAC acquisition process does require transparency regarding the target company, it is generally agreed that the due diligence of the SPAC process is not as rigorous as a traditional IPO, and it often happens much faster.
- SPAC sponsors are tasked with completing a successful acquisition within two years and are not necessarily incentivized to find the best possible deal. As a result, SPACs sometimes overpay for the target company.
- While some SPACs perform reasonably well, data from advisory firm Renaissance Capital found that the average returns from SPAC mergers completed between 2015 and 2020 fell short of the average post-market return for investors from an IPO.
As Explained by Scott Jordan
To learn more about SPACs, watch the on-demand webinar featuring a distinguished panel of experts lead by Scott Jordan. The discussion covers the current SPAC landscape with those immersed in the sector, including sponsors, a leading attorney representing SPACs, and an investment banker facilitating concurrent financings.
During the webinar, panel members provided an overview of the financing structure, capital raised to date, case studies of closed transactions, and answers to the following questions:
- Is my company a candidate for being acquired by a SPAC?
- Should my board evaluate SPACs as a viable alternative to an IPO?
- How do I position my company to attract a SPAC and raise concurrent financing?
- What are the advantages / disadvantages of going public via a SPAC, IPO, or Reverse Merger?
- What are the key success factors for closing a SPAC and achieving post-close success?
- And more!
Wrap Up
With all the hype associated with SPACs, many shell organizations have emerged to acquire, merge with, or take companies of interest public. Will this trend last long last long or die out soon, online time will tell.