All About SPAC's - What are Special Purpose Acquisition Companies?

Hey, this is Wayne Wagner with Market Vision. Today on Market Vision we're going to completely geek out on SPACs.

What is an SPAC? (Special Purpose Acquisition Company)

So what is an SPAC? An SPAC is a Special Purpose Acquisition Company. This business model was created by the regulators, created by Congress, about 50 years ago.

It is generally an investment company that finds a sector of the market that they wanted to get into and they go raise money from investors. It would be a publicly traded share, so they'd sell the shares through an IPO-type process for about $10 a share.

There's literally nothing in the business entity. Sounds a little scary. It sounds a little Ponzi-schemeish, but it is actually legal.

So they would go raise the capital and then they would go acquire a company. The prospectus usually gave them 12 to 24 months to go acquire a company.It's been this little arcane part of the marketplace where maybe a few hundred million dollars a year would be raised in this market.

Why Are SPAC's Suddenly in the Headlines?

Why are SPACs are coming up recently in the media?

It's because this small part of the marketplace that was raising maybe a few hundred million dollars a year, started accelerating rapidly:

$14 billion in new capital in 2019
$75 billion in new capital in 2020
$80 billion in money raised announced in Q1 2021

Plus, we have celebrities like Derek Jeter and Colin Kaepernick among others now sponsoring the money raises.

All of this sounds a little strange because there's a lot of capital flowing into this little arcane business structure that's been around for 50 years all of a sudden. But there's a reason for this.

What's Driving SPAC Growth?

To answer this question, we need to look back over the course of the past 15 years, really since the 2008 crash. With all of the excess regulation that came down on Wall Street flowing out of that crash, privately held companies have started to access private equity, venture capital, angel capital investing. They have figured out how to stay private longer.

Remember, the reason that companies go public is to create liquidity for their existing shareholders and access capital in the marketplace. They're looking for access to renewable capital so they can continue to expand.

Recently, companies have been able to utilize the private markets far more effectively.

New Leverage in Private Markets

We're watching those private markets have become far larger and far more robust so companies have been able to delay when they go public. There's a lot of data, a lot of things that back this up that companies have been waiting as much as a decade longer on average to go public.

Right now, we have a healthy market, obviously bouncing around all time highs and there's a lot of companies who would maybe like to go public.

The challenge is that going IPO in a crowded market is:

A lot of work
Expensive
Compliance-intensive
Anything that CEO says that's just a touch off can get him and the company sued

There's lots of reasons why companies kind of shy away from that IPO market. They don't necessarily want to go through the rigamarole of all the dog and pony shows and so forth to go IPO.

SPAC's Disrupt the IPO Process

Enter the SPACs. Rather than doing all the dog and pony show trying to find all these institutional investors, you can find an SPAC.

The thought process is that you go find an SPAC that you merge with. The SPAC is already publicly traded, allowing you to go public without having to go through the IPO process.

Rather than negotiating with all of these institutions about what the share price should be, you're only negotiating with one company - the SPAC and the SPAC management company. The SPAC has already gone out and raised capital from individual investors.

That's why all of a sudden we have this intersection of the need for capital and need for an easy way to go public. The SPAC carves out a smoother, less expensive pathway to that capital.

Growing Pains: From Millions to Billions

With tens of billions of dollars going into an area of the market that used to only handle a few hundred million a year, it's going to create some speed bumps.

To put things in perspective, it used to be that typically 20% to 40% of the SPAC money that got raised didn't get to a transaction – they didn't find a company to actually execute. Last year that number was zero.

Everybody that raised money in a SPAC got a deal done and went full cycle and merged with a company, acquired a company, and is now moving forward. These companies were all over the place in terms of what their performance after that merger, but 100% transacted last year.

SPAC money is piling up at this stage and so we would expect that there's going to be a lot of transactions done over the course of the next 12, 24, and 36 months with the amount of capital that's come into that space in the market. We're going to see a lot of this.

SPAC's Are a Trend to Watch

Inevitably there are going to be some bombs here, and there are going to be some dogs here. We don't know where they are or who they are. We're trying not to get too deep into this, not yet anyway.

As always here at Visionary Wealth Management, if you have questions, reach out anytime. We're always here with perspective for the decisions ahead. I hope you're having a great week and I hope I didn't bore you to death on SPACs today. Take care!