SPACs have been around since the 1990s, but they’ve become popular only in the past few years. In 2021, over 100 billion dollars were issued for SPACs, but why now? The simplicity of a privately-held company to become public by an acquisition or merger, rather than undergoing the lengthy process of a traditional IPO, makes SPACs increasingly popular and attractive to both companies and investors, especially as global regulations increase and make it more difficult for a company to get listed.
Special Purpose Acquisition Corporations (SPACs) are companies that are formed to raise capital through an initial public offering (IPO) in order to finance the acquisition of or merger with an existing company. An operating company can become a listed, public company by merging with or being acquired by a publicly-traded SPAC, instead of going through the traditional process of executing its own IPO.
A traditional IPO is underwritten by an investment bank, which lists the company’s shares on one or more stock exchanges. This process effectively transforms a privately held company into a public company. SPAC mergers offer many advantages over a traditional IPO, making SPACs the preferred way for management teams to take companies public. The advantages of a SPAC include access to capital for companies, even when faced with limited liquidity because of market volatility and other limiting factors. SPACs also can lower transaction fees and accelerate the time it takes to become a public company.
Essentially, a SPAC is a corporation created in the industry or sector of an investor or sponsor’s choosing, which exists only on paper, meaning it has no office or employees but can have a bank account or hold passive investments. Before offering shares to the public, SPACs seek underwriters and institutional investors. By market convention, 85-100% of the money raised in the IPO for the SPAC is placed in an interest-bearing trust account, which cannot be paid out unless it’s to complete an acquisition or return money to investors if the SPAC is liquidated. Each SPAC has a liquidation window – usually of two years – in which it must complete a merger or acquisition, before the SPAC is liquidated.
A SPAC is registered by the U.S. Securities and Exchange Commission (SEC), which means that the general public can buy shares before the merger or acquisition takes place. Once the public offering has been declared effective by the SEC, SPACs trade as units or separate common shares and warrants on the Nasdaq and New York Stock Exchange.
Wealthspring Capital is an investment advisory firm, which recently debuted its SPAC Hedge Fund. Wealthspring Capital aims to take advantage of the overlooked potential that SPACs offer.
To learn more, register and watch Wealthspring Capital’s webcast:
SPACs, The $100B Misunderstood Asset Class.
This in-depth discussion includes:
- Defining a SPAC’s lifespan
- Exploring the underlying SPAC substrate
- Discussion of historical and current data performance analysis
- Examination of benefits and risks
- Recommendations for how SPACs are used to attract clients
- Discussion of Wealthspring’s approach to SPACs with an SMA platform and Hedge Fund strategy
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