A special purpose acquisitions company (SPAC) is essentially a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company.
A SPAC is generally formed by a group of investors, called sponsors, with a strong background in a particular industry or business sector. They raise funds from other investors, and use the money to acquire an existing, privately held company —and then take it public as an IPO.
One of the first and most well-known SPAC IPOs wasVirgin Galactic Holdings(NYSE: SPCE). In 2019, the company listed on the NYSE after its successful merger with Chamath Palihapitiya’s venture Social Capital Hedosophia. It’s the first and only public commercial human spaceflight company. Shares closed at $11.75 at the end of its first day of trading.
Why SPACS are becoming popular?
SPACs embarked on their newly respectable road in the mid-2010s. Big-name entrepreneurs, hedge-fund managers, and celebrities like Richard Branson, Bill Ackerman, and Michael Jordan became involved in them, as did mutual fund companies like Fidelity and T. Rowe Price, and investment banks like Morgan Stanley, Credit Suisse, and Goldman Sachs.
Certainly, the COVID-19 pandemic has been a factor. SPACs tend tofare better in periods of stock market decline because of the way they work.
The SEC is becoming more or less involved in regulating SPAC’s and this has become a reassurance for investors.
Their numbers swelled in 2020. As of early October 2020, SPACs have launched 128 IPOs, raising a total of $49.1bn, according to SPAC Research, which gathers data on SPACs. That’s up from 2019 when just 59 SPACs raised a total of $13.6bn.
SPAC M&A has grown with issuance and deals and are getting announced much quicker from time of IPO
There has been ~$112bn of deals this year which is up 305% y/y and 54% above the aggregate from 2015-2019.
Advantages of SPACs
- They’re inexpensive : Investments in this portfolio starts from a very low price which makes it affordable
- They invest in opportunistic areas : They focus on sectors such as tech or consumer fields which are having huge potential for growth. For example Open Door has gone public via SPACs
- They’re open to individual investors : Even though institutional investors play a significant role small investors have opportunities to explore
- Speed : The SPAC merger process takes approximately 3 – 4 months compare to traditional IPO’s which are about 24 – 36 months
Disadvantages of SPACs
- Blind investment : The investors most of the time will have least information about how there money is been utilized by the company
- Lag time : There can be a long lag between the time investors pump money into a SPAC and when it actually buys up a company and starts operations
- Target company supply : The popularity of SPAC may have lead to an imbalance of too many SPAC’s and not enough standard companies to acquire
Some of top companies of SPAC IPO’s in 2020 – 21 are :
- Quantum scape
- App Harvest
There are many private companies which will continue to take the IPO route, but SPAC’s do provide certain advantages for small to mid-cap names seeking outside equity capital without the same degree of public scrutiny, legal costs associated with an IPO and relatively limited financial reporting burdens.
According to a source, Flipkart’s advisors have already approached many SPACs. The company could seek a valuation of about $35bn. The deliberations are at an early stage and the e-commerce company can also explore other options.
According to a report by The Economic Times, the online grocer Grofers is in talks to make its public market debut through a merger with New York-based Cantor Fitzgerald’s SPAC.
For details on SPAC Industry and its outlook please feel free to refer to the following SPAC report from CrispIdea: