Emerging Trend: Special Purpose Acquisition Companies

SPACs are one of the hottest trends on Wall Street. SPACs are becoming an alternative to the more traditional initial public offering or IPO for some companies as a way to raise capital in the equity markets. While SPACs are not new, their popularity has skyrocketed over the past year or so.

What is a SPAC?

SPAC is an acronym for special purpose acquisition company. A SPAC is a shell company whose only purpose is to raise funds to be used to fund a private company that is looking to go public via an acquisition. SPACs are often called “blank check companies” as they have no underlying purpose other than acquiring the privately held company.

How are They Used?

SPACs are often launched by prominent investors or a group of investors for the purpose of raising money to acquire the target company and ultimately take it public. As a blank check company, the SPAC is essentially a holding vehicle for the shares of the company the founders of the SPAC are looking to take public. SPACs are often used in lieu of the more traditional initial public offering route that was the prevalent means for a company to go public in the past.

How Investors can get Involved

Investing in a SPAC is just like investing in shares of a stock that is publicly traded on any stock exchange. An investor would simply go to their brokerage account or work through their financial advisor to buy shares in the SPAC. As with any stock you are considering, you will want to do your homework and understand the underlying investments made by the SPAC to see if this is an appropriate holding for your portfolio.

You will want to pay particular attention to any IPO prospectus and to any periodic reports the SPAC files with the SEC. There will also be a decision to be made when the underlying company that the SPAC has invested in goes public. Do you want your share of the underlying trust fund the SPAC founders created, or do you want to remain as a shareholder of the newly public operating company?

Another angle that investors can consider is investing in a SPAC ETF. There are several ETFs that have launched in recent years that invest in SPACs. This approach can help investors interested in this segment to diversify their risk away from holding one of two individual SPACs. As with any ETF or pooled investment, you will want to understand how the ETF is managed. For example, does the fund track some sort of index or benchmark? Is the fund market-cap weighted? What are the underlying expenses?

Recent Performance and Case Studies of Completed Mergers or IPOs Through Blank Check SPACs

Recently, Renaissance Capital reported that 16 SPACs raised over $3.4 billion within a week according to TechCrunch.1 Some high-profile SPACs have recorded big gains so far in 2021, including Churchill which was up over 470% before it declined after announcing a proposed merger with electric vehicle startup Lucid Motors. Some top-performing SPACS of 2020 included:

Live Oak Acquisition Corp up 171% since they announced a business combination with Danimer Scientific, a biopolymer manufacturer in May of 2020. The SPAC was founded by a veteran private equity investor and a veteran of the investment banking sector.

Kensington Capital Acquisition was started to purchase an automotive sector company. After their IPO in June of 2020 the company entered into a deal with next-gen battery maker Quantumscape in September of 2020. Kensington’s shares gained 162% since then through the end of 2020.

While SPACs seemingly dominate the headlines in the popular financial media, not everyone paints an optimistic picture. A study by the Harvard Law School Forum on Corporate Governance painted a more sobering picture.2 They studied 47 SPACs that merged between January of 2019 and June of 2020. A few of their findings included:

  • Many SPACs issue shares initially valued at $10. The median SPAC’s cash after their merger was equivalent to $6.67 per share.
  • While SPACs are a cheap way to go public, they found that this is in part because SPAC investors tend to bear much of this cost.
  • Many SPACs with high-quality sponsors tend to do better than others, overall they found that post-merger share prices dropped by one-third or more.

Summary

SPACs are a hot trend for companies that are looking to raise capital. Many SPACs are formed by experienced investors in the investment banking and private equity space. Like many trends on Wall Street, it will be interesting to see if this one is here to stay or if SPACs are a passing fad. Connect with a Wedbush Advisor for answers to your questions about SPACs.

Sources

  1.  Tech Crunch, Verizon Media, February 20, 2021, click to access source
  2. Harvard Law School Forum on Corporate Governance, Harvard University, November 19, 2020, click to access source

Disclosure

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.

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