So, what is a SPAC? And why is there so much market talk about these?
SPAC stands for "special purpose acquisition company". It can also be referred to as a “blank-check” or “shell" company. Essentially, a SPAC is a publicly traded company formed by a group of investors with specialized experience in an industry who are looking to acquire a target company, essentially taking a private company, public. Until it acquires a company, the SPAC does not have any revenue or operational business. Essentially it raises money which stays on the balance sheet until a target acquisition has been negotiated.
There are two weaknesses that can be attributed to SPAC's.
a) Lack of Transparency: Due to current regulations the company (SPAC) cannot publicly disclose the target businesses it may be interested in acquiring and
b) Limited Time to get a deal done: It has a limited timeline of two years to acquire a target or it has to dissolve.
Essentially, you are betting on the experience and track record of the investors or "sponsors" as they are reffered to. It's essentially a leap of blind faith.
There are of course advantages to SPAC's which is why higher calliber sponsors/investors such as Bill Ackman and Chamath Palihapitiyaare are pursuing them. The key advantages are:
a) Time to Market: Compared to an IPO which can take 12-24+ months to be administered from start to finish, a SPAC can be completed in as little as 3-5 months.
b) Cost: IPO's are expensive to prepare and administer the costs can be approximately 6-9% of the funds raised. The cost to administer a SPAC on the other hand averages around 3-4% of total funda raised which can be up to 50% less than the same costs to administer an IPO.
Like pre-IPO investors, private investors in SPAC's can make tremendous returns when the acquisition target is completed and the stock reflects the full value of the acquired companies.
The ordinary investor has to wait until the SPAC is listed on a public stock market before it can invest and while such an investment can be lucrative, it pales in comparison to the potential returns that can be made by a private investor who can get in at significantly lower prices. There is of course risk associated with every stage of any venture. The earliest stages of any venture typically carry the highest risk, hence the more favorable private investor entry pricing.
Almost 250 companies have gone public via SPAC's in 2020 alone and there is approximately $60 bilion currently in SPAC's waiting to acquire target companies.
We will do another article on some SPAC examples in 2021 to see how they fare.