What the Heck is a SPAC?
SPAC is an acronym for special purpose acquisition company. Also known as a “blank-check company,” a SPAC is a cash-rich shell company that raises money from investors in an initial public offering and seeks to acquire a private acquisition target over a fixed time period. Simply stated, it serves as a vehicle to bring a private company to the public markets.
SPACs have emerged in recent years as a viable alternative to the traditional initial public offering as a way for a private company to complete a going-public transaction. Its emergence as an asset class has been made apparent by its fast growth over the past few years.
Source: S&P Global
After the economic hangover from the 2008–2009 global financial crisis, SPAC issuance was left for dead. However, over the past three years, SPAC financing has come back with a vengeance. In 2019, SPAC financings reached a record annual haul of $12 billion. Last year, the 59 special purpose acquisition company IPOs represented 25% of total initial public offerings. In the first quarter of this year, the trend continued with 13 SPAC IPOs, which represented nearly 30% of all initial public offerings.
There are currently 98 SPACs outstanding representing an aggregate market value of $27.5 billion. Accelerate’s proprietary AlphaRank SPAC Monitor showcases all outstanding SPACs.
Source: Accelerate
SPACs are a legitimate, multi-billion-dollar asset class that is here to stay, while offering a unique arbitrage opportunity for enterprising investors.
How Do SPACs Work
The typical SPAC is a Delaware corporation that completes an IPO for as little as $40 million to as much as $800 million, although there isn’t a set minimum or maximum. Over the past two years, the average SPAC initial public offering has raised $234 million.
In the IPO, a SPAC offers units to investors for $10.00 per unit. Each unit consists of a common share and a fraction of a warrant. Units contain anywhere from 0.25 warrants per unit to as much as a full warrant per unit. The warrant terms are such that they offer the investor the option to buy more shares at $11.50 per share in the future (as long as five years), giving a SPAC unit investor further upside on the performance of the company.
Capital raised in the IPO is placed in a trust account, which is tightly governed. This capital may only be invested in the safest securities — typically U.S. treasuries of tenors less than 185 days. These funds cannot be used to finance the operations of the blank-check company as it searches for an acquisition target. The capital raised in the IPO remains in the trust account accruing interest and is only used to acquire a company or to distribute to redeeming shareholders. To provide the necessary working capital, the SPAC sponsor subscribes to private placement warrants, which will allow the sponsor to buy shares at $11.50 after it completes a business combination. This investment in private placement warrants represents capital at risk for the sponsor. If they do not get a deal done within the allotted time frame, the millions of dollars spent on the private placement warrants are lost. The private placement warrant financing provides working capital to the SPAC, so the IPO proceeds in trust remain untouched until the deal vote, business combination or company liquidation.
Where is the upside for the sponsor or promoter of the SPAC? In exchange for setting up the blank-check company, funding the working capital through a subscription of private placement warrants and searching for a business combination, the sponsor is given founder shares for nominal consideration. These founder shares convert to 20% of the pro-forma equity once a business combination is complete. If a SPAC fails to complete a business combination within the specified time frame, these founder shares become worthless as are the private placement warrants. There is immense financial pressure for a sponsor to get a deal done.
$GPAQ $GPAQW
AI
