If you’re an investor who stays up-to-date on Wall Street trends, you’ve probably heard the acronym SPAC in the news a lot recently. The alternative to the traditional IPO model opens up a whole new world for companies looking to go public — and investors looking to buy stock.
The trend is so hot that Lux Capital co-founder Peter Hebert says SPACs are “stealing from the 2021 IPO calendar.”
Well-known companies like Taboola and Opendoor joined the 200 SPACs that went public in 2020, raising a historic $64 billion in funding in the US alone. 2021 is on track to potentially quadruple last year’s SPAC fundraising numbers, having raised over $44 billion by February alone.
But what IS a SPAC and how are they affecting the market? Here’s everything potential investors need to know about SPAC IPOs:
What is a SPAC?
SPAC is an acronym that stands for Special Purpose Acquisitions Company. It’s Wall Street speak for a shell company set up with the sole purpose of raising money through an IPO to eventually acquire another company. SPACs have no commercial operations, no products, or sales. They’re set up by Wall Street insiders or industry experts like former CEOs, who investors trust to do a good job acquiring a private company.
Why are SPACs popular right now?
The so-called “blank check” companies are so popular that Betsy Cohen Betsy, who led a SPAC that recently took car insurer Metromile public, recently called IPOs “backward-looking,” relics of the past. But why? For one, they’re much faster than IPOs, and they require companies looking to go public to divulge less financial information (which could help avoid issues like the ones that plagued WeWork’s IPO publicly messy IPO). This offers huge benefits for companies that are close to being ready to go public but would need more historical data first.
What do investors need to know about SPAC IPOs?
- First, a SPAC acquisition is a liquidity event, just like an IPO.
- Second, deals happen much more quickly. It takes the average company between 6 and 9 months to go public through a traditional IPO once they’ve begun the process. However, SPACs typically have an accelerated time frame to find, acquire, and complete the merging of a company, which quickens the timeline of deals. According to PwC, SPAC acquisitions often happen in as little as 4 months.
- Third, the deals are much less volatile, which means an investor in a company acquired by a SPAC can rest easy. Unlike traditional IPO’s, SPACs aren’t subject to unexpected changes in the market and are free to decide for themselves what a company they’re looking to acquire is worth. The company sells for a fair deal which they agree to, so there are no surprises.
- Lastly, there is a LOT of money in SPACs right now, and it’s opening up the kind of companies who can go public. If you’re an investor, you might want to consider looking into niche industries that would normally take a long time to go public, like Fintech, which according to CNBC are being targeted by huge SPACs despite the fact that, “cash burn rates are high and real GAAP profits often won’t come for years, even under the best circumstances.”
If the prospect of SPAC acquisition has you interested in investing in a pre-IPO company, drop us a line to talk about your options.