The Rise of SPACs

A new investment vehicle recently invaded markets, having a profound effect on traditional investing.  A SPAC, or Special Purpose Acquisition Company, has drawn enormous attention in recent months.  SPACs are becoming extremely popular with nearly everyone who has large sums of money and willing to invest.  From NBA All-Star Shaquille O’Neal, to Republican giant Paul Ryan, to world-renown investor Bill Ackman, SPACs are a must have.  According to Peter Atwater, founder of research firm Financial Insyghts, “If you don’t have your own SPAC, you’re nobody” (Ramkumar and Farrell, 2021).  These new investment vehicles have uprooted traditional capital raising.  

Traditionally, investments in private companies were largely made through non-bank Finance, such as Venture Capital, Growth Equity, or Private Equity.  These firms are generally reserved for high-networth individuals attempting to enjoy higher rates of return than usually found in public markets.  These firms also comprised the finest investment talent in the world, generating an extremely competitive and sought after industry for finance professionals.  A recent Wall Street Journal article details the fundamentals of SPACs: 

SPACs—which stands for special-purpose acquisition companies—are essentially big pools of cash listed on an exchange. Their purpose is to find a private company, buy it and take it public quickly. Some on Wall Street call them “blank-check companies’’ because the investors backing the SPAC put up their money months before an acquisition target is identified, trusting the people running the show to find a good deal.  (Ramkumar and Ferrell, 2021).  

Essentially, SPACs allow funds to be raised in public markets for a future purchase to be made in the private markets.  

At the moment, SPACs have enormous attention and are being used at a rapid-fire rate to raise funds.  Their future, however, is incredibly uncertain.  They are currently presenting a threat to traditional IPOs, as over 70% of capital raised last month was in SPACs.  This figure is also up 20% in each of the last two years.  Part of this is due to the fact that investment banks love SPACs.  Often, investment banks can underwrite SPACs more quickly than a traditional IPO.  While a SPAC may take three to five months to go public, IPOs can take over a year.  This time efficiency in addition to the comparable fees make SPACs extremely popular for investment banks (Young, 2020).  

SPACs are not only being used by investment banks.  As the investment vehicle has become record-breakingly popular, Private Equity and Venture Capital firms have shown increasing interest in their toolbox to enjoy higher returns.  Should SPACs continue with this current rate of popularity, they have the potential to change the way the Private Equity industry functions.  It is possible that Private Equity could shift their focus largely to SPACs, as this past summer exemplified numerous Private Equity backed SPAC launches (“2020: Private Equity embraces the Special Purpose Acquisition Company during a record year”).  

SPACs also pose the ability to change the investment banking industry’s future.  While the fee structure in SPACs is generally lower than that of a traditional IPO, investment banks have the possibility of selling their advisory services in the future when it comes time to acquire a target company.  This high earning potential in addition to the previously mentioned quick turnaround and ability to churn out numerous SPAC deals quicker than IPOs lure investment banks to this idea.  Furthermore, certain Initial Public Offerings by various investment banks in recent years have come under large scrutiny.  Certain discrepancies in valuations have left massive amounts of capital on the table in trading days for some companies and their insiders.  This practice is offset in SPAC fundraising due to much more certain valuations (“2020: Private Equity embraces the Special Purpose Acquisition Company during a record year”).

In conclusion, SPACs have been in existence for a few decades, however, became increasingly popular in 2020.  Part of this is likely due to bankers pushing for this resurgence.  SPACs offer better initial fees for their clients, however they pose a potential for further capital to be paid to investment banks through advisory services.  These investment vehicles have the potential to change the investment banking, as well as the Private Equity industries.  Private Equity firms realize the opportunity to use these vehicles to their advantage, with the rise of Private Equity-backed SPACs being used in their portfolios.  With newer legislation in place regulating SPACs, 2020 may be an indicator for the future of investing.  

References:

Ramkumar, Amrith, and Maureen Farrell. “When SPACs Attack! A New Force Is Invading Wall Street.” The Wall Street Journal, Dow Jones & Company, 23 Jan. 2021, www.wsj.com/articles/when-spacs-attack-a-new-force-is-invading-wall-street-11611378007?mod=searchresults_pos2&page=1. 

Killourhy, Michael. “Michael Killourhy.” Ogier, 8 Oct. 2020, www.ogier.com/publications/2020-private-equity-embraces-the-special-purpose-acquisition-company-during-a-record-year. 

Ramkumar, Amrith. “2020 SPAC Boom Lifted Wall Street's Biggest Banks.” The Wall Street Journal, Dow Jones & Company, 5 Jan. 2021, www.wsj.com/articles/2020-spac-boom-lifted-wall-streets-biggest-banks-11609842601.

Young, Julie. “Special Purpose Acquisition Company (SPAC).” Investopedia, Investopedia, 14 Dec. 2020, www.investopedia.com/terms/s/spac.asp#:~:text=A%20SPAC%20generally%20has%20two,of%20the%20major%20stock%20exchanges.