SPAC: The investing trend du jour

2020 is a year for the record books and its latest mania is SPAC investing.

A SPAC, also known as blank check company, is a special purpose acquisition company and it’s the hottest trend in investing. According to Goldman, there have been 51 SPAC offerings in 2020, raising a record $21.5 billion, up 145% from the same period a year ago.

A SPAC is essentially a shell company listed on a public exchange that uses the funds it raises from selling shares to acquire a private company or startup within a certain time frame, typically two years. In plain English:

• A SPAC is a company without a company. 
• SPACs go public for the sole purpose of one day acquiring a real company. 
• SPACs collect cash from new investors in the  initial public offering (IPO), even though those investors don't know what they'll end up owning. 
• The SPAC has 2 years to buy a real company, or the $$ gets returned to the investors. 

SPACs have been around for years, but gained popularity recently as a way for companies to go public. Private companies can take their stock public in a few ways:

• IPO: The company creates new shares of itself then hands things off to investment banks. They do roadshows, set the stock's price, then sell shares to public investors. Most companies go public this way.
• Direct listing: No new shares are created. Existing shares held by the founders, early investors, and employees simply become public, with supply/demand on exchanges like NYSE or Nasdaq determining the price. Slack and Spotify did this recently.
• Acquisition: A private company is gobbled up by a public one, and becomes public by association. This happened to Postmates when it was recently acquired by Uber.  
• Blank check or SPAC acquisition: Technically, this is an acquisition. The SPAC uses the cash that it raised during its IPO to buy a private company and the acquired becomes public. This has been the most popular route as of late. Nikola, Utz, and Virgin Galactic have already done it. While others such as Fisker, MultiPlan and Luminar have already announced plans to merge with SPACs to go public.

Why are blank check acquisitions so popular lately?

• Easier, less costly and the outcome ($) is more certain: When going public via an IPO, a company has to deal with underwriters, investors, and a volatile market before it knows how much capital it will raise. Market volatility has been very wild lately due to the pandemic. In a blank check acquisition, negotiations are simpler, involving only the company and the SPAC.
• Limited private financing: Start-ups/private companies are having a really hard time raising dollars in private financing. Venture capitalist are exercising more caution because there is simply too much uncertainty in the market with the coronavirus still causing havoc. Acquisition by SPAC has thus become the best path - in many cases the only one - for private companies to raise capital. This is why blank check acquisitions have been recently popular in the electric vehicle industry and other capital intensive industries. These private companies need billions of dollars and can't raise it through private financing at the moment.   

Bottom line, SPACs aren't real companies, but one day they could be. Investing in a SPAC is like outsourcing money to be invested by a manager and having no control over what they'll buy. “Bet on me” is the pitch that backers of SPACs make to investors. This certainly seems to be working in 2020 as SPACs have been raising money and doing deals at a never-before-seen rate. In the next post, I will discuss why investors should look before they leap into investing in SPACs. 

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.