SPACs have been around for decades but have gained traction over the last few months due to the large influx of new investors, stimulus, and a favourable monetary policy. While 2020 can be regarded as the comeback year for many unconventional themes, SPACs too made a massive comeback.
In simple terms, a SPAC(special purpose acquisition company) is a blank check company with no commercial operations that are formed with the intention of raising capital through an IPO(initial public offering).
A total of 165 global SPAC IPOs from January to October 2020 were listed, five times that of 2015. In 2019, there were ‘only’ 59' SPAC IPO’s raising $13.6 Billion.
Taking a company public through an IPO can be a lengthy and tedious process. Think of a SPAC as the lazy route for an IPO. Instead of going through with an underwriter, a company can simply merge with a SPAC company that is already public and become publicly traded.
Breaking it down
Here’s the catch though. Investors have no idea which company the SPAC will eventually merge with. Instead, they have to trust the leadership/advisors to find a company with great potential.
Since a SPAC has no business operations, it raises money mainly by selling shares and the leadership team usually has extensive experience in a particular industry the SPAC will be part of in the future. The money raised by selling shares is held in a trust account and the money is returned to the shareholders with interest if the SPAC hasn’t acquired a company within 24 months.
The private company receives the money after it agrees on the merger with the SPAC. After a certain period of time where certain legal obligations are met, the SPAC is delisted from the exchange and the private company is listed under a brand new ticker symbol.
As a shareholder, it’s your choice whether you want to stay invested with the newly merged company or sell the shares and move on.
“In this extraordinary year, traditionally-raised capital suffered. SPACs have found the way to inject needed funds into capital-starving companies” — Dr. Emir Hrnjic, head of fintech training at the Asian Institute of Digital Finance
IPO Vs. SPAC
- Time frame: IPO 8–12+ months Vs. SPAC 3–4 months
- Diligence: IPO requires a diligence review by the underwriter(eg: Goldman Sachs). SPAC due diligence done by potential PIPE investors. Private investment in public equity(PIPE) is when private investors take a significant investment in public companies below current market value.
- Forecasts: IPO prospectus does not use projections Vs. SPAC showing projections in the proxy statement.
- Research: IPO will have equity analyst research and underwriter research Vs. SPACs with limited research
Benefits of SPACs
Buyers pay a pre-IPO price for a stock that could start trading at much higher prices. Retail investors typically do not have access to traditional IPO’s.
A good example of this is Warren Buffet’s $735 million investment in cloud data platform snowflake at an IPO price per share of $120. When Snowflake(NASDAQ: SNOW) debuted on the exchange, it opened at $234USD which puts retail investors at a disadvantage from day 1. With SPACs retail investors get the opportunity to invest well before such a price increase.
This allows individual investors to act as their own private equity fund. Just type the ticker symbol of the SPAC on your exchange and you’re on your way to buy a surprise company at an IPO price.
Base Price: $10.
SPACs are floated at $10 and are highly reactive to announcements, merger news and leadership tweets. If you manage to find a SPAC in a trending sector under a good leadership within the $10–12 range, you would have an uncapped upside and a maximum of 16.6% downside( % lost If the SPAC falls from 12 to 10)
Due to the base price of $10, SPACs can be used as a cash reserve instead of holding liquid cash which we all know is depreciating as I write. A SPAC priced between $10–12 will hold its value remarkably well even during 8–12% dip in the markets.
2020 SPAC IPO’s hit all the right spots as they mainly focused on the hot and trending areas of fintech, Electric vehicles, Medtech, gaming, etc.
This could be the asymmetric risk-reward bet retail investors have been waiting for.
Risks of SPACs
Despite all the hype in 2020, the historical rate of return on SPAC IPOs are lower than that of traditional IPOs. Who knows, maybe ‘this time, it’s different?’
Apart from that, the uncertainty of not knowing which private company that will be bought by the SPAC can be considered as a disadvantage as well. If the leadership team does not execute, investor capital can be held up to 2 years with no returns. The opportunity cost of capital where investors could have gained better returns elsewhere should be considered.
Another risk is shady companies that cannot go through the traditional IPO process which require a vast amount of documentation might choose to go via SPACs which generally have low requirements.
A rather dreadful example of this is Nikola Motors(NKLA) where price popped all the way up to $94 purely on hype and optimism before crashing all the way to $13. Nikola had no viable product, just clever marketing.
How much time are you willing to wait with flat/minimal returns?
How much trust are you willing to place on the management team?
Investing is inherently risky. Not investing however, is even more risky.
Click here to to find out some under the radar SPAC picks for 2021with upside potential.
Notable SPACs
Online gaming giant Draftkings(NASDAQ: DKNG) merging with Spinning Eagle acquisition corp with a net gain of 440% as the stock rose from $10 to $53.70 in 13 months.
Online real estate company Opendoor(NASDAQ: OPEN) merging with Social Capital Hedosophia II led by Venture capitalist Chamath Palihapitiya with a net gain of 160% as the price rose from $10 to $26.03 in 6 months.
EV charging company ChargePoint merging with Switchback energy(NYSE: SBE) with a gain of 310% since it started trading in September 2019.
Mountain Pass(NYSE: MP), the only company with a rare earth mining and processing site in North America currently trading at $31.87 with a performance of 217% since June 2020.
Tracking SPACs
Useful tools to keep in touch with SPAC updates.
- Spactrack.net: Filter all the crucial information you need to know about SPACs
- SPAC insider: A Trusted Resource for Current Information on the SPAC market
- FinTwit on Twitter: Anthony Ohayon, Joey Solitro, Deadnsyde, Chamath Palihapitiya (SPAC God)
References
What are SPACs & The Trend in 2020 | CB Insights Research (2021). Available at: https://www.cbinsights.com/research/report/what-is-a-spac/
List of Shell Companies or SPACs (2021). Available at: https://stockmarketmba.com/listofshellcompanies.php
Home — Pounding The Table Podcast (2021). Available at: https://poundingthetablepodcast.com/
