A Special Purpose Acquisition Company (SPAC), also known as a “blank check company” is a company formed with no commercial activity or operations, with the sole purpose of raising capital through an initial public offering (IPO) with the mandate to acquire and merge with an existing private company (the target).
When a SPAC acquires an existing private company, it’s referred to as a reverse merger. This is contrasted with a traditional merger, where a public company is taken private (delisted) after being acquired by a private company.
How SPACs Work
SPACs are formed by firms or individuals (sponsors) with experience and expertise in a certain business area or sector, with the intention of finding good companies to acquire. When the SPAC is formed, the potential target company is often not disclosed to avoid any additional scrutiny during the SPAC IPO process. So, the reputation of the SPAC sponsors is incredibly important, as SPAC investors often only have that to rely upon, with the confidence that the sponsors will select an appropriate company to acquire.
The funds contributed to the SPAC IPO are required to be held in trust, usually invested in interest-bearing government bonds, and to be used only for the purpose of acquiring a company or to be returned to the investors if the SPAC is liquidated. An acquisition generally needs to be completed within 2 years before funds must be returned to investors.
Once a target has been identified, the SPAC will bring in outside equity investors or may also raise debt financing to complete the acquisition.
Once the acquisition has been approved by a majority of the SPAC shareholders, the SPAC shareholders have the option of either swapping their shares for shares of the newly merged company or redeeming their SPAC shares to get back their original investment, plus any interest accrued while that money was held in trust.
Advantages of SPACs for Target Company
For the target companies, there are a number of advantages to being acquired by a SPAC:
- The acquisition is more flexible and much quicker than going public through an initial public offering (IPO), as the SPAC is already a publicly-traded entity.
- The acquisition is less affected by extreme market volatility and public market sentiment.
- Founders and shareholders of the private company target are able to sell a larger percentage of their ownership than in a traditional IPO.
- The founders avoid lock-up periods for selling shares that come with a traditional IPO.
- The target company founders are able to fetch a higher acquisition price by negotiating a fixed valuation for the company with the SPAC sponsors.
How to Invest in SPACs
There are two primary methods for investing in SPACs:
- Direct Investment in Active SPAC
- Invest in a SPAC ETF
There are hundreds of individual SPAC securities available to invest in, each in various stages of the SPAC process – pre-IPO, searching for a target, in negotiations, or closing an acquisition. Visit SPACTrack for a comprehensive updated listing of all available SPACs, with their founders, industries, and current status.
There are also several SPAC Exchange Traded Funds (ETFs) available, which invest in and hold dozens of SPAC investments; allowing you to gain access to a diversified bucket of SPACs.
- $SPAK Defiance Next Gen SPAC Derived ETF: tracks an index of US-listed, SPACs and SPAC-derived companies. 40% of the portfolio are SPACs and 60% are post-deal companies.
- $SPCX The SPAC and New Issue ETF: an actively-managed fund that aims to provide a broad exposure to SPACs and newly-listed firms. The selection process centers on two factors: who’s the management team behind the SPAC; and what’s their track record. The fund doesn’t hold the post-merger company. Today, the ETF holds about 88 SPACs.
- $SPXZ Morgan Creek – Exos SPAC Originated ETF: an actively-managed fund to invest in SPAC-derived IPOs that have completed or yet to complete a business combination. SPXZ is a mix of SPACs and post-deal companies: 33% of the mix is SPACs only; 66% of the mix is post-deal companies. SPXZ is also an equal-weighted portfolio.