SPACs are the new buzzword on Wall Street. From Silicon Valley investors to respected businessmen, showbiz stars, and ordinary people, who doesn’t love a seemingly great earnings opportunity spiced with a touch of glamor and exclusivity?
These are all among the cast of characters that have promoted or bought into the SPAC fever that has swept the U.S. in the past year. SPACs are special purpose acquisition companies, which means they are companies set up for the purpose of a takeover or business combination. (As the CEO and founder of SPACs Consultancy Ltd., writing about SPACs might benefit me in attracting clients looking for SPAC advice.)
More than 240 SPACs listed in the U.S. (on NASDAQ or the NYSE) last year, raising a record $83 billion, according to SPAC Research. SPACs have already surged past last year’s record in the first quarter of 2021, raising $98.1 billion. So far, 2021 has been a good year for traditional IPOs too, with 194 IPOs raising $67 billion, according to Renaissance Capital.
However, the boom that made 2020 the year of the SPAC started to cool this April, following warnings from the U.S. Securities and Exchange Commission. The compelling question today is: Could the trend be here to stay or will SPACs follow dinosaurs toward extinction?
The SPAC craze has been shaking the U.S. for months, mainly because of its simplicity: A bunch of investors decide to buy shares at a fixed price in a company that initially has no assets. In this way, a SPAC, also known as a “blank check company,” is created as an empty shell with lots of money to spend on a corporate shopping spree.
It’s a bit like a lottery ticket—the initial stake is small, but in terms of potential gains, the sky’s the limit. At the same time, every SPAC is finite: If you do not find a target within a preset time frame (usually about a year or two), the SPAC is liquidated, and the investors get their money back. Once the SPAC finds a suitable target company, it merges with it. Then, the business shoulders the same operational, financial, or reputational risks as any other company.
Traditional IPOs are under attack. Look at Deliveroo’s IPO in March in the U.K. It closed down 26% on its first day of trading. The share price slump means tens of thousands of retail investors who backed Deliveroo are now sitting on heavy paper losses. Think also of Ant Group’s pulled IPO in 2020.
SPACs are emerging as the new IPO, or IPO 2.0. They have everything an IPO has, with fewer formal requirements and at a lower cost.
Some argue that SPACs are the next bubble to burst. Somewhat like a proposal of marriage, a private company will need to consider whether the SPAC approaching it is a worthwhile partner for long-term life as a public company. This might be risky. Also, critics wonder whether companies listing via SPACs can live up to investors’ sky-high expectations.
These skeptics should look to the U.K., where electric vehicle firm Arrival, which had yet to record any revenues, went public in March by merging with a SPAC in New York. Today, Arrival is valued at more than $10 billion.
Or look at what is happening with Grab, the Singaporean multinational mobile app leader for deliveries, mobility, and financial services in Southeast Asia. The company, valued at $40 billion, decided in April to use a SPAC to list on NASDAQ. As opposed to traditional IPOs, SPACs offer more certainty for the target to go public with a consistent valuation process.
It is undeniable that SPACs are a great financial innovation. Through SPACs, private companies gain access to public funds and have an opportunity to be directed by reputable managers who can bet on innovative ideas. What is not often mentioned, though, is that SPACs are also believing in other people’s entrepreneurship dreams.
Daniele D’Alvia is a teaching fellow in banking and finance law at Queen Mary University of London and CEO and founder at SPACs Consultancy Ltd.
