For many company founders and investors, one of the many important milestones to know whether you have made it is going public. Going public is a means to further expand one’s company by allowing the public to trade in its stocks and own stakes in that company. By going public, companies communicate to the general public and interested investors that it is a trusted brand worthy of investment. In doing so, raising capital becomes easier and many other avenues for profit, such as expanding and acquiring assets become available.
Companies usually go public through making an IPO or an initial public offering. This means that they will be selling shares of their company to the public for a price. This allows investors from different parts of the globe and different backgrounds to buy and sell their stock in the company based on that company’s value. But there are many downsides to going public. For one, the financial market isn’t always as excited to cash in on IPOs. Especially during recessions or when the economy is down, investors do not exactly have the best appetite for taking on risks. There are also a number of limitations restricting how early and how much of their shares company founders can sell.
Many companies, in order to escape many of the negative sides of going public, prefer to go a different route: selling their companies to a special purpose acquisition company (SPAC). Because many companies are opting for this choice instead, more and more SPACs are popping up, and many investors are getting in on this trend.
For a person looking to invest, however, putting money in a SPAC may be a promising new venture to earn profits. If you are one of the people currently asking, “What is SPAC?” Or, “Should I invest in SPAC?” This article will go over questions about SPAC investing, as well as give you an overview of SPAC trends.
What are SPACs?
Special purpose acquisition companies (SPACs) are not like other companies. They essentially have zero commercial operations of which to speak. They do not make or sell products or do most of the things regular companies do.
SPACs exist for only one thing: to buy private companies for the purpose of making those companies public. Like what was said earlier, there are many downsides to going public through an IPO. SPAC IPOs are where SPACs basically go through the gruelling IPO process so other companies don’t have to do so.
In return, the SPAC founders and the SPAC investors in SPAC earn money from the size of the stake they have in the company they purchased. The goal of a SPAC is to find the best company to buy and the best deal they can find. In order to do so, it enlists a SPAC management team. Otherwise, if they do not find a company to buy within a specific period, the capital the investors put in would revert back to its shareholders.
The SPAC does not usually state what kind of company it wants to buy. That’s why it’s often called a “blank check company.” The SPAC relies on the reputation and expertise of its founders to attract investors, with the promise that you will get a good share once the SPAC finds a good company to buy.
How SPACs Work?
First, let’s clarify some terms to avoid confusion. The SPAC founders are those who invested a large amount of capital to form the SPAC company and make it go public through an IPO. The SPAC investors are those who bought stock in the company, either before or after the company goes public. The SPAC managing team is the team in charge of finding a profitable company to buy.
Now, then. A SPAC starts with the initial investment of its founders. The founders of the SPAC put in enough capital to make an IPO. They then make a contract with a trusted investment bank to manage the IPO for the SPAC, usually in exchange for a portion of the IPO profits. The proceeds from the securities sold during the IPO, which were bought at a unit price representing at least one share of the common stock, are then placed in a trust account. The proceeds will be held there until such time that the SPAC finds a company to acquire.
After going public, the SPAC management team has a year and a half to two years to find a company and complete the process of buying it. This process is actually called as SPAC Merger. The deadline depends on what kind of industry the SPAC management team is looking into. A crucial component of whether the SPAC will buy a specific company is if its fair market value is worth usually at least 80% of the proceeds of the IPO currently held in trust.
Once they have found a worthy acquisition and buys that company, the SPAC founders will profit from the transaction with at least ? of the common stock. Meanwhile, the investors will get an equity interest based on their investment. However, if the SPAC management team fails to find a worthy company within the deadline, then the investors would receive back the IPO proceeds inside the trust account. As an incentive to find a deal and meet the deadline, the SPAC managing team is prohibited from receiving salaries and commissions until the completion of the purchase.
Why Should You Invest in SPAC?
As an investor, you’re banking on the ability of these founders to find a deal that would net you the most amount of money from the acquisition. SPAC founders are usually business titans whose experience and reputation would most probably lead them to find and purchase a large profitable company.
But while it seems that you’re gambling based on another person’s ability to close a deal, it’s less risky than that. Like we already mentioned, the SPAC managing team must identify a viable company for the purchase and complete the buying process in at most two years. Otherwise, the IPO proceeds will go back to you. You will either profit from the successful purchase of the company or get your money back. Not a lot of investments can promise that.
A lot of companies also want to be purchased by SPACs. Aside from having a faster means of going public, it also is more profitable selling a company to a SPAC than through a regular private equity transaction. It also makes the process of going public less risky for that company. Thus, it isn’t a matter of whether your SPAC management team will find a good company to buy, it’s whether they can find the best one before the other SPACs. Either way, the possibility to grow your investment is there.
SPAC Trends in the Market
SPACs have been around for decades, but they have experienced a meteoric rise in the last three years. In fact, Deutsche Bank, Goldman Sachs, and Credit Suisse, among the world’s largest financial institutions, have begun underwriting for SPACs. This is only one of among many SPAC trends that spell out the future of these companies.
In 2019, SPACs have broken the record in the amount of IPO money they raised by luring in big-name investors and underwriters. Fundraising in SPAC IPOs, from $3.2 Billion in 2016, hit a record of almost $14 Billion in 2019. Virgin Galactic, owned by billionaire Richard Tycoon, went public when 59% of its stock was purchased by Social Capital Hedosophia Holdings, a SPAC owned by Chamath Palihapitiya, a venture capitalist.
In 2020, more than 50 SPACs were formed in the US alone, raising upwards of $20 Billion in value. The SPAC Pershing Square Tontine Holdings alone raised $4 Billion in its IPO. This SPAC was founded and sponsored by Pershing Square Capital Management founder, Bill Ackman. From NBA legend Shaquille O’Neal to executives from successful sports and media brands, prominent figures from different industries are looking to cash in through sponsoring and founding their own SPACs and have said yes to the question, “Should I invest in SPACs?”
However, there are also risks in investing in SPACs. In general, SPAC individual investors have low levels of profit due to many SPACs underperforming in the stock market and falling below the price of its IPO. The least-risky way of generating profits from SPAC investment is investing before it goes public. After that, SPAC investing becomes a matter of researching which SPACs are more successful and well-managed than others..
From a company’s perspective, an acquisition by a SPAC is a means to accelerate its growth and expand the base of its investors without many of the hassles attached to going public through an IPO. But for individual investors, it is a way to earn money by relying on the instincts and acumen of tried and tested venture capitalists and industry mainstays.
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