SPACs

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SPACs, or special purpose acquisition companies, are sometimes referred to as "blank-check companies." That's because SPACs raise money in an initial public offering, then put it in a trust earning interest. The SPAC's sponsors search for an operating company to merge with and negotiate a deal. If they fail to find a target within a set period, typically two years, they return the money to investors. [1]

Special purpose acquisition company transactions may be considered as a capital-raising alternative to initial public offerings (IPO) or other financing activities. SPAC transactions result in the private operating company involved becoming a public company. [2]

New-found Popularity

Although SPACs have been used for decades as alternative investment vehicles, they came into vogue in 2020 as seasoned investors and management teams turned to SPACs to mitigate the increased market volatility risk of traditional IPOs. The year 2020 has been a record-breaking one for SPAC IPOs, with the surge driven by the influx of high-profile investors and management teams entering the SPAC space, coupled with an abundance of uninvested capital that had largely sat out the first half of 2020.[3]

SPACs accounted for about half the money raised on U.S. exchanges in 2020, after being just a fraction in previous years, according to a Financial Times report on November 1, 2020.

The FT said companies had raised $66 billion through listings on the New York Stock Exchange by November 2020, compared with $61 billion on Nasdaq, with nearly two-thirds of the proceeds raised on the NYSE coming from SPACs. The two exchanges have attracted a similar number of SPACs, but the NYSE has raised twice as much as Nasdaq by landing the larger deals. [4]

According to research from Bloomberg Intelligence, SPAC IPOs have raised about $140 billion from first-quarter 2020 into first-quarter 2021 and the investment class is forecast to top $53 trillion by 2025. However, some analysts have questioned if SPACs listings are appropriate for certain sectors. Investors in environmental, social and governance (ESG) businesses, for example, want to verify their environmental and social impact but unless a SPAC's planned ESG-related acquisition is identified upfront, that kind of evaluation is not possible. [5]

Chicago-based SPAC Research estimated U.S. SPACs raised some $89.7 billon in capital in 2021 by March of that year, up from $83.4 billion in 2020. [6]


References

  1. 16 SPACS Approaching Their Deadlines. Know the Risks.. Barrons.com.
  2. A primer on SPACs. Deloitte.com.
  3. A primer on SPACs. Deloitte.com.
  4. NYSE wins back listing crown from Nasdaq after luring SPACs. Financial Times.
  5. SPAC and ESG Fads on Collision Course With Billions at Stake. Bloomberg.
  6. US SPAC IPO Issuance. SPAC Research.