Insights / 17 March 2021
Special Purpose Acquisition Companies – An innovative solution to capital raising
Despite being around for almost two decades, special purpose acquisition companies – commonly referred to as SPACs or, metonymically, “blank check companies” – have recently risen to prominence within the financial sector.
There are many causes and attributions for this recent surge in interest – it could be the slew of industry veterans such as Bill Ackman and Billy Beane who have recently launched their own SPACs, the fact that 40% of 2020’s IPO volume came from these structures, the search for yield in a world of ever-decreasing interest rates, or some combination of all of these factors and more. Whatever the reason, SPACs have become the vogue in the financial world this year.
The basic premise underpinning SPACs is straightforward; they’re companies with no commercial operations, formed as a means of raising capital through an IPO or to acquire an existing company. The moniker of "blank check company” comes from the owners of the SPAC seeking to navigate the often complex disclosure requirements which ensue from the purchasing of companies; to get around these, they simply don’t reveal their target acquisition, meaning that investors aren’t aware what company they’re investing in until it has been purchased.
After having raised capital, a SPAC typically has a deadline of two years to complete a deal otherwise it faces liquidation. After an acquisition or IPO, a SPAC is usually listed on one of the major stock exchanges, however in the UK SPACs primarily list on the Alternative Investment Market (AIM) as opposed to the London Stock Exchange itself.
There are numerous benefits to SPACs; they can be an attractive option for the owners of smaller companies, which are often private equity funds, as selling to a SPAC can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment. Additionally, the long-running boom in private equity and venture capital augments the appeal of SPACs; investors who poured money into buying companies over the past decade want to cash in by selling them, resulting in a surplus of companies for SPACs to buy.
The rise of SPACs is taking place concurrently to trillions of dollars’ worth of dry powder idling in private equity and venture capital funds. When combined with the fact that many companies with strong financial viability are feeling less inclined to raise capital through the costly and time-consuming process of listing on the stock market, the business case for SPACs becomes evident. Additionally, for retail investors SPACs present an opportunity to gain access to fast-growing companies which may otherwise remain inaccessible to them, and out of their grasp.
The effects of the coronavirus pandemic invariably served to augment the rise in prominence and attention being paid to SPACs. According to SPAC Insider there were 248 SPACs IPOs with gross proceeds of $83mn in 2020. In 2021, there have been 100 SPAC IPOs with gross proceeds of $29mn which more than doubles the total figure for 2019 ($13mn). Currently there are 574 SPACs globally, meaning that 69.6% of SPAC IPOs have occurred since the beginning of 2020.
There have been some incredibly high-profile SPACs launched, which has contributed to the spotlight they find themselves under; online sports betting company DraftKings, for example, became a public stock in April after completing a merger with Diamond Eagle Acquisition Corp. in a $3.3bn deal.
Investors seem particularly fascinated with the latest SPACs as they’re getting into cutting-edge, high-profile businesses. In 2020 QuantumScape was the best performing SPAC IPO returning 1,115%, QuantumScape develops next generation solid-state-lithium-metal batteries for electric vehicles. In second place, the digital sports entertainment gaming company, DraftKings retuned 444%.
In a typical SPAC listing, the shell company sells a “unit” in its IPO for $10 dollars each. The unit includes 1 common share and a warrant to purchase another share later typically at a strike price of $11.50. The SPAC then has two years to find an operating business to purchase and shareholders get to vote to approve the deal. If they decide to vote no and redeem their shares, they can get their $10 back in cash along with interest.
However, analysis conducted by the Financial Times of SPACs launched between 2015 and 2019 shows that these cash shell structures may pose a risk to retail investors. The majority trade below $10 per share, the standard price where SPACs first sell their shares to the public. These numbers are less than appealing, and even big-name firms such as private equity firm TPG have been affected by them; they have three SPACs, none of which trade higher than $10.20.
Additionally, SPACs have not been immune from reputational issues, particularly following the financial crisis when a series of poor acquisitions led some investors to hold SPACs to ransom by withholding approval for acquisitions. Rule changes dealt with some of these abuses, but there are still those who disparage SPACs for targeting underperforming businesses, providing a back door to the public markets for companies that would have trouble completing a traditional public offering.
And yet despite these issues, SPACs do invariably address and solve issues within the market; they help with liquidity or fund-raising post-listing, and can also give flexibility over valuations. Larger SPACs in particular are beneficial to retail investors, due to the significant levels of funding they raise which allows them to compete with private equity for acquisitions and VC’s for the provision of growth capital – both industries which retail investors historically have difficulty accessing. It would seem, therefore, that now their benefits are in the public eye SPACs look set to stay, and will continue to provide capital-raising solutions for many years to come.