In the past few years SPACs have come to prominence and while they are not entirely new, there is more buzz and beyond that a few interesting acquisitions that have taken place recently.
This year alone 2021 there has been over 130 SPACS with plenty more planned for this year. SPACs as we will refer to them from now on, are non-operating publicly listed companies that are setup with the purpose of purchasing a private company.
What is a SPAC
In simple terms, a SPAC is created for the main purpose of raising capital through an IPO (Initial Public Offering) for the purpose of acquiring an existing company.
SPACs may also be known as blank check companies and it allows a company to go public without going through process of an IPO. They provide an opportunity for retail investors to invest in private equity type transactions.
In many cases the investors in the SPAC will pool their funds together with the purpose of investing in a company.
How does a SPAC work
Money is pooled together by investors in the SPAC, a timeframe is allocated for which the fund is used to purchase the target company and after the acquisition, the SPAC is usually listed on the one of the major stock exchanges.
The fund put together for the SPAC is placed in an account and will not be a returned to the investors unless a company is acquired or the allocated time has elapsed and the SPAC liquidated.
Why do SPACs Exist
There are a number of ways a private company can go public and SPACs are just one of the ways. The other ways are via a Reverse Merger or an IPO.
When a company chooses to go public via an IPO a process needs to be followed and during this process, each aspect of the business is checked such as debt level, any risks and the financial health of the business among other things.
Once the SEC is satisfied, depending on the location the company can begin to work with the Exchange to get a ticker symbol through which potential investors will be able to purchase their shares.
The IPO process can take months if not years and with the multiple lockdowns brought about by Covid-19 and delays to listing, it is not too hard to see why investors chose to go public using SPACs.
SPACs are another way a target company can be acquired without having to go through the IPO process. During the covid-19 pandemic as an example, many companies that had IPOs planned saw their plans negatively impacted by the lockdown so SPACs were an easier way for investors in the target company to get their money.
From a SPAC sponsor, the reasons for doing a SPAC include being able to take advantage of opportunities in a shorter period of time, SPACs are an alternate source of capital and the opportunity to apply a wide range of investment strategies.
For the target company, here are a number of reasons for doing a SPAC.
- SPACs offer more flexibility with capital.
- Quicker time to get to the market when compared with an IPO.
- There is added value from the investors in the SPAC from their knowledge and past experience in that sector.
How to Invest in SPACs
Look out for new SPAC listing from financial news sources and pay attention to associations like SPAC Research as they highlight filings which are formal notices that a SPAC intends to go public.
Investors can invest in a SPAC by purchasing individual SPAC securities or by purchasing an ETF that tracks SPACs. A SPAC ETF will provide a certain level of diversification and security since the impact of one SPAC underperforming will be minimal compared to buying an individual SPAC.
SPCX is the first actively managed SPAC ET, SPXK and SPAK are a few SPAC ETFs and other SPAC companies that are not ETFs.
A few noteworthy SPACs include PLBY (Playboy if you guessed it right) who partnered with Mountain Crest Acquisition Corp. On the first day of trading the price was down by 2.7% but these are early days.
As of the 13th of February 2021, the founders of LinkedIn and Zynga are close to a deal to merge their blank cheque company with Joby Aviation as the FT put it. The SPAC in this case is called Reinvent Technology Partners and their SPAC which raised $690m in 2020 may close out this deal by the end of February.
Lucid Motors an electric car maker has announced the biggest SPAC to date as they have formed a merger with Churchill Capital IV Corp. The PIPE or Private Investment in Public Equity is priced at $15 a share.
To make the UK more attractive for SPACs, the UK Government is looking into review the legislation that will allow fast growing tech companies to list in London. The government is looking or relax the rule around SPACs.
The Good Bits
A majority of SPACs are priced at $10 a share so they are cheap and provide an opportunity for retail investors to purchase them.
On the first day of trading, the price of the SPAC does not jump very much and on average in 2020, there has been a modest increase in the price on the first day of trading.
SPACs provide the opportunity to invest in companies that will be shaping the future. Virgin Galactica, Nikola the electric automaker and Draftkings are among a long list of companies that have gone public via SPACs.
SPACs are more accessible to smaller investors. Considering the price of SPACs and the higher number of share available, smaller investors are able to get in on the action as it were.
The not so Good Bits
When investors put their money together and form a SPAC, the possibility remains that the allocated time to find a deal (usually 24 months) will elapse before a target company is acquired and in that time, the money would have just sat in an account.
Whilst SPACs have made a recent comeback, not all SPACs have had a stellar performance. Virgin Galactic Holdings (SPCE) has appreciated 146% in the year since it went public, but others have barely outperformed the index in which they are listed.
Final Note
SPACs or blank cheque companies have been around for some time but to the impact of Covid and other factors, a few high profile acquisitions and mergers has renewed interest in this topic.
These companies are formed with a small group of investor initially who pool their money together and look for the right company to acquire. There usually is a timeframe in which the SPAC needs to find a deal otherwise the money which is saved in an interest bearing fund is allocated back to the initial investors.
The companies that had planned their IPOs in early 2020 were impacted by the lockdowns that followed in the year and many had to abandon or postpone their IPO plans.
SPACs are an alternative for both the Sponsor and Target to get to market and open up the opportunity to smaller investors. Can you lose money on SPACs? Yes – just like any other investment and although many SPACs are priced around $10, their price can go up or down when trading commences.
Investors can have a piece of the action by looking at news sources or relevant outlets to know what upcoming deals are there. ETFs mentioned above provide a more diverse way to invest in SPACs.
