The Rise of the SPAC

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

Perry Bean

Wealth Advisor

 

You may have heard financial pundits speaking about “SPACs” recently. A SPAC, or Special Purpose Acquisition Company or “blank check company”, is a company formed to raise capital through an initial public offering (IPO) with the intention of deploying the capital through acquisitions and mergers of private companies. In other words, the SPAC goes public as an empty shell company with no tangible assets and then later acquires private companies that “go public” given its acquirer (the SPAC) is a publicly traded company – a sort of back-door IPO. The prevalence of SPACs has exploded in recent years with 223 SPACs filing IPOs totaling more than $73 billion in 2020 alone.

Prior to a SPAC IPO, the SPAC sponsor outlines the company’s objective, but they do not disclose the companies they intent to acquire. Investors who purchase shares of the SPAC in the IPO often do so based on the track record of the SPAC sponsor’s expertise, track record, and management history – they are essentially making bets on the SPAC’s sponsor.

One example is Chamath Palihapitiya’s company Social Capital. Palihapitiya was an early executive of Facebook and Social Capital has sponsored a series of SPACs that often focus on the acquisition of early-stage private technology companies. Historically, investing in these types of companies has largely been reserved for high-net-worth investors through private investments (such as private equity funds). SPACs have made investments in these companies available to “retail investors” on the public markets.

SPACs typically have two years to deploy the capital and while shares often IPO at $10 per share, the average value per share is typically diluted to approximately $6.67 by the time an acquisition or merger is complete[i]. This dilution is caused by the customary 20% “promote” (fee) to the SPAC sponsor, 5.5% to the investment bankers (underwriting fee), and the interest paid (and warrants issued) while the funds are held in a trust prior to an acquisition. According to a report from Renaissance Capital, 89 of the 223 SPACs that filed IPOs in 2020 completed mergers or acquisitions. By September of 2020, the average return of the 89 SPACs was -18.8%[ii].

While SPACs can provide access to companies that might otherwise have been reserved for private funds, it is important to be mindful of the potential drawbacks. Although SPACs have been around since the 1980s, the track records of less-seasoned SPAC sponsors (e.g., NFL quarterback Colin Kaepernick) have yet to be determined. As such, potential investors will want to perform proper due diligence on these more novel investment opportunities.

facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

Tips to Help You Stay Strong During Market Volatility

It’s almost impossible not to feel anxious at the dips and dives the stock market has been taking recently, compounded by relentless inflation-focused headlines. That’s why you might be surprised to learn there’s a lot of positive news to be had, despite the market uncertainty. 

529s, Roth IRAs and Other Strategies for Your College Savings Plan

By Craig Lemoine, Director of Consumer Investment Research   I often find college savings at the top of my pile of financial stressors. Unless I find a money tree in my backyard, my oldest child is going to turn 18 well before I retire. We all have different values surrounding the educ …
1 2 3 95 96 97

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation