THE ISSUE WITH SPACs
SPACs Have Their Moment Wall Street is spitting out special-purpose acquisition companies at a frenzied pace—but let the buyer beware BY CHRISTOPHER VECCHIO
B
y now, nearly everyone who’s interested in finance has heard of SPACs. They’re the special-purpose acquisition companies typically led by someone with a familiar name—perhaps a well-known fund manager or even a famous athlete. Those famous or nearly famous people fund their SPACs with initial public offerings (IPOs). But the companies they’re launching don’t have any fixed assets or products to sell. Think of them as publicly traded piles of cash. They’re blank-check companies created to buy something else. Investors contribute money to a SPAC, which puts the funds into a trust to acquire one or more businesses. But here’s the catch: If a specified period of time passes without an acquisition, or the acquired company doesn’t
meet an investor’s standards, then the investor can get the funds back. Think of SPACs as synthetic convertible bonds. They’re an investment vehicle that offers the upside convexity of equities and the downside protection of a bond backed by the credit of the issuing company. SPAC frenzy SPAC formation reached an all-time high last year, and it’s continuing at a breakneck pace. Some consider them the ideal investment vehicle in an era of zero interest rates. In 2009, just one SPAC was navigating the deal process, and it was worth $36 million. By 2018, that number stood at 46. At the end of 2020, 254 SPACs worth $82 billion were operating. Thus far in 2021, 213 aspiring SPACs
have filed for an IPO while another 269 are searching for acquisitions, bringing the total to 483 as of March 18. Why not an IPO? SPACs serve as reverse-IPOs. Instead of an established private company raising funds by going public, a SPAC operates as a shell entity that’s already raised funds and is looking to bring a private company public. The IPO process requires a roadshow that lasts several months and includes scrutiny of financial information, but the SPAC process does not. On the day of listing, SPACs are being filled, on average, within an hour of the open, but the average IPO is not seeing fill day-of until at least noon prior to trading. Meanwhile, investors have shifted away
100,000
300
SPAC IPO Transactions: Summary by Year
250
Source: spacinsider.com as of April 5, 2021
200 60,000 150 40,000 100
20,000
50
0
0 2009
14
SPAC IPO COUNT
SPAC IPO GROSS PROCEEDS (MMS)
80,000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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