Last year has been tumultuous in the financial world. The recovery plans and low interest rates have flooded the markets with liquidity and made investors look for alternative ways to boost their returns. One of those is the special purpose acquisition companies (Spac). In this article we will explain and analyze this new phenomena.
As the name indicates Spac’s are companies that raise money through an IPO in order to acquire other businesses. The Spac is supposedly a more easy way for private companies to raise money in the financial markets then an IPO is. It also provides early investors with a reduced risk investment. If a deal is not struck within the determined time frame (often 2 year’s) the money is returned to the investors. Those early investors receive both shares and a warrant that gives them voting rights and is possible to convert to a share after that the deal is closed. This makes it interesting for investors to sell their shares and exercise the warrants once a deal is struck.
However, Spac’s are starting to be victims of their own popularity.The increasing number of Spac’s looking to strike deals with private companies makes it difficult for the former to find suitable targets. This is also starting to reflect in the financial markets as more and more are trading at discounts. Thereby, so far only 25% of the Spac’s that have been listed since 2019 have striked deals with private companies, underlying the harsh competition.
The increasing popularity of Spac’s also raises scrutiny from the Securities and Exchange Commission (SEC). Indeed, Spac deals involve many parties that all earn a lot from the mergers. This makes the SEC wonder if investors are not too exposed to risk in comparison to the private equity funds launching the Spac’s. Also, a Financial Times analysis has shown that some companies that have been taken over by the Spac’s have proven to show inflated figures of growth to investors. This is a major difference with regulations around IPOs where the incorporation of future growth figures is not allowed.
In conclusion, the Spac currently has interesting financial characteristics and could be an interesting investment opportunity. However, it is now more and more victim of its own success as competition is getting harsher and SEC scrutiny is looming.