What the SPAC?

Introduction

2020 seems to have been SPAC-tacular. As many as 40% of all funds raised by new listings were raised using SPACs in the US, with over $48bn raised. SPACs refer to Special Purpose Acquisition Companies, and simply means that a group of investors has written a blank cheque to a sponsor to invest in a business.

How does it work in practice?

The investment process works a little back to front from your regular investment process. Traditionally, a sponsor pitches a clear investment thesis, backed by deep analysis and insightful data on a prospective market or company.  Instead, a SPAC involves a back-of-the-envelope investment plan – usually specifying a vague sector and a request for a war chest. The expertise and profile of the sponsor is the only metric that the would-be investor can rely on.

Usually, the sponsor has 2 years to buy or merge with another business, and must get the express approval of the investors prior to acquisition. Failing this, the capital is returned to the investors with interest.

SPACs are usually listed on equity exchanges to allow a sponsor to attract an even wider pool of investors. In the US, Nasdaq has a monopoly on SPACs, but its European competitors are eyeing up the opportunity. London Stock Exchange has recently shown interest to attract SPACs.

When the listed sponsor finds its target company (usually a private company), it merges with that target. This process (otherwise known as a “reverse takeover”) means that the start-up becomes a listed company without the hassle of doing an IPO.

The goal of the SPAC is for its share value to explode as it consumes a high growth target. For example, Tortoise Acquisition Corp (a SPAC) gained 370% when it announced its intended investment in Hyliion.  

Too good to be true?

SPACs do have some down-sides for the investors. Blank cheques leave investors exposed to a lack of governance and almost no investment parameters. The only chance the investors have is that a majority of them refuse the investment decision at the time of acquisition. Moreover, SPACs haven’t performed very well historically, having lost 3% a year compared to the market.

Although SPACs are like hot potatoes in the US, Europe is still lagging. Apart from its more conservative approach, Europe also faces some technical issues (e.g. in the UK, shares in SPACs are suspended in case of a reverse takeover until a prospectus is created), as well as the fact that investor voting on deals is uncommon.

How do SPACs compare with SPVs?

If you are not keen to write a blind cheque, SPVs are still the most common method of single deal investing in Europe (and the world). Investors get the benefit of a clearer investment strategy relating to a potential acquisition prior to investing as well as historical financial data. Deals can be invested in on a case-by-case basis, giving the LPs the power to decide.

That being said, there is nothing to stop a sponsor creating a Private SPAC. Using an SPV legal structure, a sponsor could remove limitations on permitted investments from the prospectus. This could avoid having to list the entity, and allow for more flexibility in the investor terms (e.g. not requiring investor approval for the deal).

How do I set up a Private SPAC?

You need to cultivate a great deal of trust and confidence in your investor base. A blank cheque approach is very alien to European investors (which is probably why traditional SPACs have not lifted off on this side of the Atlantic). That’s not to say that they won’t. See for instance Search Funds in the private equity space.

It helps if everything you have ever touched has turned into gold-dust.