Five Things You Need to Know About SPACs

 

Special Purpose Acquisition Companies (SPACs) are becoming an increasingly popular option with investors over the last few years. Essentially, SPACs are unique company structures that are created for the purpose of raising public capital to acquire particularly selected private assets.

 

While SPACs come with their own set of advantages and risks, their increased use is mainly attributable to their distinct characteristics that allow retail investors (the general public) to invest.

 

Since SPACs are already a legitimate public company that has gone through the hoops of an initial public offering (IPO), the private company has an easier time coming to the general market. With the numerous benefits and rise in popularity, it’s beneficial to learn as much as we can about their structure, advantages, risks, and opportunities. Here are five topics that can assist in learning about SPACs.

 

They have tradable stock

Investors in SPACs carry the benefit of optionality, with potentially limited downside during the acquisition phase. This comes down to two main factors: escrowed funds and the ability to freely trade shares.

 

Since SPACs are publicly traded companies, investors may buy and sell units on the market at any time. In addition, the funds raised from investors are escrowed until the acquisition target is approved and transacted. This means that the company’s underlying cash backing is more stable, offering a relatively certain market price for traders prior to the SPAC finding a suitable target.

 

In the worst-case scenario, where a deal is never found or successfully completed, the investor will effectively get their entire investment returned. The only variables on the escrowed funds are any interest earned during the holding period or the agreed costs involved with sourcing and negotiating the failed transaction.

 

They’re booming in popularity

There’s a big reason SPACs are becoming increasingly popular – they offer a range of benefits to all parties involved. SPACs provide direct-to-market liquidity for private assets while increasing investment opportunities for public investors.

 

A decade ago, in 2011, there were fifteen SPAC IPOs raising a little over $1 billion. In 2020, there were 248, raising over $83 billion. As of March 2021 (only a quarter through the calendar year), there have been 231, raising nearly $75 billion. Their exponential popularity is certainly not something to ignore.

They offer a clean structure that allows for quicker deals

The process of setting up a SPAC IPO is often much quicker to complete than the IPO process of a regular customer. The statements required from SPACs are much simpler and can be prepared within weeks. Since the entity is brand new, there are no current financial results to report or existing risks to the business. There’s no drama or cost involved with cleaning out an existing shell company with a damaged history.

 

From the perspective of the acquisition target, SPACs offer an appealing opportunity. Instead of going through the onerous IPO process themselves, the acquiring SPAC has done the work for them. Money has already been raised, and there are no applicable thresholds for the target to meet. This means that smaller companies that would not qualify for an IPO can still bring their phenomenal growth prospects to market via a SPAC.

 

They have a time limit and investors retain participation choice

The management team of a SPAC is entrusted with millions of dollars from investors. Unlike many other investments, there is no open-ended freedom to use the funds as they deem fit. Management must find a suitable acquisition target within a predefined period of time – often two years or less. If they cannot find an agreeable deal, funds are returned to investors.

 

Furthermore, once a deal has been identified, SPAC holders retain a choice to participate. In practice, this means that while investors do not choose the acquisition deal, they are able to ‘opt-out’ if they no longer wish to participate – receiving reimbursement of their funds. They’re also able to vote on whether they approve of the investment opportunity presented. SPAC investors get a say, while contributors to traditional venture capital funds do not.

Special Purpose Acquisition Companies are easier than ever to access

Thanks to the booming popularity, both retail investors and their private counterparts have increased access to SPACs, from the opposite angle. Retail investors can participate in SPAC IPOs or purchase and trade shares in an already floated vehicle.

 

Previously, it was far more onerous and prohibitive for public investors to play in the sandpit of private, sophisticated investors. SPACs make the link both feasible and potentially more lucrative than ever before.

 

Private placement investors and institutions that invest in private assets also have far greater liquidation opportunities via SPACs. Instead of conducting an IPO of their own, SPACs offer abundant options to negotiate and sell their company to a trustee of public funds.

 

HUDSONPOINT Capital offers a range of alternative investment opportunities for retail and institutional investors, benefiting in multiple ways from the SPAC structure. By pooling investor’s funds, HUDSONPOINT Capital’s alternative pre-IPO and private investment platform offers unique investment solutions with risk-adjusted return profiles designed to meet your unique financial goals. Get in touch today to discuss your investment options. If you’re interested in adding SPACs to your portfolio, please schedule a call to learn more about SPACs.

 

Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates. Private Shares are for qualified investors and involve a high degree of risk

There is a risk in buying pre–IPO shares is that the company may never IPO. In those cases, since the shares never trade on the open market, they are highly illiquid and it becomes more difficult (although not impossible) to sell them for a profit.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

Securities offered through National Securities Corporation Member FINRA/SIPC