Born in the 1980s, special purpose acquisition companies (SPACs) are growing up. A surge in SPAC activity that started in 2019 only grew in 2020, bolstered by the market volatility brought on by the pandemic – but also by an influx of more serious investors in a previously niche space. By the end of 2021, SPACs had raised $160 billion on U.S. exchanges – a new record that nearly doubled the level of the previous year.
While some cautionary tales have emerged – one, WeWork, even received the artistic treatment in a recent Hulu series – and regulators are applying increasing scrutiny, these are also signs that SPACs are maturing. And that their explosive growth, somewhat tempered now in 2022, presents opportunity for individuals and families interested in the more sophisticated vehicles SPACs have evolved into.
Here we explore some of the reasons you might consider investing in a SPAC:
An IPO without the wait
In simple terms, SPACs offer private companies the opportunity to go public without a direct IPO. This starts with a SPAC being established as a publicly traded corporation established by a sponsor with the goal of using the funds from its own IPO to acquire a privately held firm in a specific industry or business sector – typically an industry or sector in which the sponsor has expertise. The entity then has a fixed time period, usually 18 to 24 months, to identify and acquire a target firm or return funds to its investors. Once a target firm is acquired, it merges with the SPAC, the SPAC is dissolved (or de-SPACed), and the resulting company is public.
One of the most attractive features of a SPAC is its timetable. Compared to the extensive preparation and oversight that can make the IPO process last a year or more, the entire SPAC cycle – from raising capital to acquiring a target company to taking that company public – happens in a matter of months. This is because SPACs generate no revenue and do not publicly identify target firms, requiring less arduous disclosure and regulatory review.
A seat at the table
Another attractive feature of SPACs is the opportunity for prominent investors to play a role in the decision-making of these entities by serving as directors or officers on SPAC boards. Whether it’s bringing prior investment experience to bear or offering insight specific to the industry a SPAC is pursuing, investors have the chance to play an active part in outcomes.
One high-profile example is Serena Williams, who served on the board of Jaws Spitfire Acquisition Corp in its pursuit of 3D printing company Velo3D. According to a Reuters report, Velo3D went public with a valuation of $1.6 billion, netting $500 million in proceeds for the combined company, and Williams lent her experience as an “entrepreneur, investor and brand-builder” to the process.
Access to innovation
The most popular target for SPACs is U.S. startup companies with high growth potential. And because they are cash-rich – offering increased certainty of closing – and often retain companies’ management teams post-close, SPACs are an attractive prospect to these emerging targets. According to the Harvard Business Review, “SPACs have allowed many companies to raise more funds than alternative options do, propelling innovation in a range of industries.”
The option to opt-out
Perhaps the most important feature of “modern” SPACs, as noted in research published by the Yale Journal on Regulation, is the “opt-out clause.”
After the sponsor identifies a target and announces a proposed merger, investors have the option to withdraw their support and redeem their shares for the original cash they invested plus interest.
While the points in favor are compelling, it’s wise to take care and be dogged in your due diligence, particularly with regard to quality of management since you’re investing in a planned outcome and not a known commodity. And, of course, it’s important to exercise general caution, given the exuberance and rapid expansion of the SPAC market over the past three years. Which brings us to a reason you might decide to forgo SPACs for now:
Has the bubble burst?
According to analysts from Renaissance Capital, of the SPAC IPOs in 2021, nearly 70% were trading below their $10 offer price by September of that year. CNBC reported in February 2022 that more than 600 SPACs existed in search of targets – heady competition that may have influenced the growing number of SPAC sponsors withdrawing their ventures from listing in early 2022.
Based on industry headlines, there still isn’t consensus on whether we’re in a mid-burst or post-burst environment. But the lesson for potential investors is the same: proceed with interest and with caution.
The return and principal value of all stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve a higher degree of risk.
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