Also known as blank check companies, SPACs are another method that can be used for taking a privately held organization public. As per Ido Fishman, a lot of people believe SPACs can only be used for hot technology startups, but this is not the case. They are now being widely used in numerous industries. You should remember that SPACs themselves don’t have any underlying business, due to which the term ‘blank check’ is used. Instead, the goal of the SPAC is to acquire a firm for the primary purpose of taking it public.
As opposed to traditional initial public offering (IPO), Ido Fishman states that SPACs can facilitate a direct and quicker approach for interested organizations in gaining access to the capital markets. What does the process involve? Let’s take a look at the steps:
A sponsor of a SPAC decides to take the shell company public for the purpose of raising cash to make an acquisition. Even though the specific rules can vary, there are typically two years for the SPAC to be able to identify a target for the merger and close the deal.
In order to sweeten the pot, Ido Fishman says that SPAC sponsors often go on a roadshow, which is similar to an IPO. They reach out to institutional investors during this time, such as private equity firms or hedge funds, for increasing interest and gaining capital.
After the funding process is complete, the sponsors place the money in a blind trust until the management team of the SPAC can decide which company to acquire. As per Ido Fishman, retail investors do have the option of trading shares of the SPAC, but there is not much movement in price until the management publicly discloses the acquisition target.
This is usually revealed when a nonbinding letter of intent is signed by the SPAC as well as its acquisition target. These can result in rampant speculation amongst retail investors. A definitive agreement is signed if the two parties are able to agree to the terms. Then, the SPAC shareholders have to vote for the deal and if approval is given, the SPAC’s ticket symbol changes to that of the company acquired.
Benefits of SPACs
According to Ido Fishman, SPACs have become popular because they offer startups that are interested in going public an easier and quicker method than the traditional IPO, which does tend to be complicated. SPACs have also garnered a lot of interest recently, even though they didn’t have the best reputation previously. But, the top power brokers on Wall Street have taken an interest in SPACs recently, which has led to high-quality management teams.
A problem with traditional IPOs is that you have to deal with multiple variables, which include the price of the stock. But, as Ido Fishman points out, the valuation is already a known fact where the SPAC is concerned because the merger target just negotiates with them. Furthermore, shareholders who are not interested in investing in the revealed acquisition target have the option of backing out and getting their funds back, before a definitive agreement is made.
SPAC Investment Opportunities
Depending on your investment level, there are three different ways that you can go about for investing in SPACs. Check them out below:
- Sponsor group
According to Ido Fishman, SPACs are typically sponsored by senior investors with a track record of purchasing and running companies. Obviously, the risk is higher for the sponsors than the investors because the latter have the option of getting their money back once the deal is announced. But, it is also a fact that investors have a higher potential for returns, as most deals provide more than 6x cash on returns.
- SPAC IPO
Another great opportunity that retail investors can consider is investing into a SPAC IPO directly, particularly when you consider the benefit of getting your money back. An online investing platform called Robinhood has become quite popular amongst retail investors because it is offering SPAC IPOs.
Ido Fishman states that after a target company is identified, most SPAC sponsors use a PIPE for raising money. This is referred to as private investment in public equity that can provide insurance on the capital previously raised in the IPO. Institutional investors can use this opportunity in the same way as hedge funds.
Why they Exist?
Essentially, privately held startups can use SPACs for going public without having to go through the lengthy and onerous vetting process associated with a traditional IPO. As per Ido Fishman, SPACs are able to navigate around disruptions that have an impact on federal institutions like the US Securities and Exchange Commission (SEC), which is a relevant benefit in times of COVID where shutdowns can happen.
Most importantly, Ido Fishman highlights that SPACs provide retail investors with opportunities for expanding their portfolio and include assets that are similar to private equity investing.
One of the most important things that every investor should remember is that regardless of how much due diligence and homework they do in traditional IPOs or SPACs, the reality is that you cannot guarantee anything. Even the best business experts have been burned because public debuts didn’t go well.
Ido Fishman says that you can mitigate the risk by considering opting for SPAC exchange-traded funds (ETFs). These feature a basket of SPACs with shell companies or startup prospects seeking their target acquisitions. The good thing about ETFs is that they can help you in spreading the risks, so a problem in one SPAC will not completely derail your portfolio.
For the most part, SPACs have managed to take over business headlines because they provide startups with a more straightforward and easier path to going public. The convenience is definitely impressive and this has resulted in a huge increase in the number of SPACs in the last couple of years. The COVID-19 pandemic has also increased their adoption and it is unlikely to die down anytime soon.