SPAC-tacular

The year 2020 is when SPAC, the obscure finance term, was added to the popular lexicon. The nickname “blank check company” has often dominated headlines. Nikola is perhaps the most prominent example of a tech company that has gone public this way.

So what exactly is SPAC and how does it work? 

Special-purpose acquisition companies, SPACs, usually go public with offerings in $10 units which consist of one common share and an out of the money warrant. The SPAC manager outlines the criteria of the business it is looking to merge with, and then start to look for such a target. Once a target is identified, the manager will ask for a shareholder vote to go ahead with the merger. The documents on the target are provided confidentially to the shareholders for the vote, and will subsequently file publicly once the merger is announced. 

If the manager fails to find a merger target within a pre-specified about of time, the SPAC is dissolved and the money raised through the public offering is returned to shareholders. 

What led to the increase in SPAC’s popularity?

There is an increased number of SPAC deals in recent years, mostly driven by two factors- the participation of household name investment banks and retail demand. 

In a traditional IPO process, the consortium of advisors would provide underwriting to the company, putting up capital upfront. In a SPAC process, the SPAC manager raises money directly from the capital market due to the light due diligence and the fact that shareholders have an opportunity to vote in the merger process. Therefore, SPAC deals are usually advised by middle-market investment banks that don’t usually get the same cache. 

In recent years, the size of the PE and PE-style deals have increased dramatically. Household investment banks have realized the opportunity and established their practices. Those bulge-bracket banks have helped to propel SPAC deals into the popular vernacular.

The demand from retail investors has also increased over the years. SPACs allow retail investors to invest in private equity-type transactions, particularly leveraged buyouts. Retail investors can have access to an experienced management team composed of three or more members with prior private equity, mergers and acquisitions, and/or operating experience, which had been out of reach previously.