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Global Investment Guide

SPAC Definition

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The strategic SPAC serves a similar purpose as VC.
Photo by Markus Winkler

SPACs (Special Purpose Acquisition Companies) have become an attractive investment vehicle during the recent Covid-19 crisis, the number of SPAC IPOs in 2020 has doubled compared to 2019.

SPACs raise capital through the traditional IPO way to acquire a privately held company.

Why SPACs are Attractive?

SPAC sponsors are the big winners of the recent boom, receives 20% of the shares of the SPAC as “founders shares”.

Many SPAC sponsors are well-known in their field, institutional investors (pension funds, hedge funds, mutual funds) have long invested in SPACs.

The strategic SPAC serves a similar purpose as VC (venture capital), becoming a typical pitch for the tech companies searching to go public quickly.

SPAC Procedure

A SPAC deal is appealing to some companies to the traditional IPO because of speed and strategic partnerships.

The traditional IPO takes years to complete but the SPAC sponsor typically has 24 months to acquire a company, raise capital and go public.

The capital raised from the SPAC IPO is placed into a trust account until the shareholders approve the acquisition.

Shareholders may vote against the acquisition and redeem their shares.

The sponsors can promote the SPAC deal to institutional investors for additional funds by PIPE (Private Investment in Public Equity) transaction – called De-SPAC’ing process.

Warren Buffett found PIPEs are attractive because they could buy shares or securities at a discount rate.

In recent times, Wall Street investment banks are heavily involved in the PIPE deal as placement agents.

Successful SPAC IPOs

Virgin Galactic Holdings (SPCE) founded by Sir Richard Branson went public via a SPAC IPO in 2019 has appreciated 146% returns in the year.

Pershing Square Capital Management founded by hedge fund manager Bill Ackman, raised a $4B SPAC in 2020 — the largest SPAC to IPO to date.

SoftBank, the world’s largest tech-focused VC firm, distributes $100M+ rounds to smaller private companies in a wide range of sectors.

References:

  • The fast track IPO – Success factors for taking firms public with SPACs – papers.ssrn.com
  • EMERGING TRENDS IN THE SPECIAL PURPOSE ACQUISITION COMPANY MARKET: IMPLICATIONS OF FRONT-END IPO UNDERPRICING – repository.tcu.edu
  • How special purpose acquisition companies (SPACs) work – pwc.com
  • SPAC Research – spacresearch.com
  • A SPAC is a high-risk but potentially profitable way to get in on the ground floor of a new stock — here’s everything investors need to know – businessinsider.com
  • Almost everything you need to know about SPACs – techcrunch.com
  • What Is A SPAC? – cbinsights.com
  • Special Purpose Acquisition Company (SPAC) – investopedia.com

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