getty
A SPAC, or special purpose acquisition company, is a shell company with no operations of its own set up to take another company public without going through the traditional IPO process. The idea is to group a series of retail investor funds to finance a merger or a leveraged acquisition within a set period.
Also called blank check companies, there is little blind faith at work here, and they bear no resemblance to the type of opportunity announced during the South Sea bubble in 1720 that offered investors “a company of great advantage, but nobody knows what it is.” In the case of SPACs, investors hand over money to be used for an unspecified acquisition, but with much more reasonable security guarantees. The standard structure allows investors to vote on any possible proposed transaction, as well as the option of recovering their money if the proposed transaction does not interest them, along with two-year term to either do a deal or return the cash, which in the meantime, is kept in escrow. The people behind the SPAC cannot, in principle, take all the money, nor enter into a given operation if they cannot convince their investors.
Why am I talking about SPACs? Because they’re flourishing in 2020 like never before: by the middle of this month, some 141 SPACs had been carried out the course of the year, compared to 58 in 2019, 41 in 2018 or 33 in 2017, with figures such as Chamath Palihapitiya or Reid Hoffman involved in these kinds of deals. This kind of “investment fury” is leading some to worry about a market that could be offering few opportunities to investors with excess liquidity, which could lead to the search for opportunities and even the development of a possible bubble, which should invite extreme caution.
For many, the idea is to trust an experienced figure to identify a company and then not only capitalize it but take it to the stock market simply by acquiring it or merging with it. In that sense, SPACs are not particularly cheap because the person who leads them usually retains 20% of the money obtained when the operation takes place, but they eliminate the need for an IPO, with its associated delays and uncertainty. This year, many venture capital funds have considered SPACs as an interesting alternative, which has also contributed to their proliferation.
We can expect to see quite a few operations of this type in the future, with news surrounding both their incorporation and the merger or acquisition agreements they reach. This is a way of dynamizing a market that offers opportunities to both investors and entrepreneurs in the form of a much faster vehicle than the traditional alternative. As always in these cases, SPACS come with their own risks. Bubble? No bubble? Crazy investors? Funds in search of easy money? An opportunity-laden market? Long live rock ’n’ roll…
