This year, a word that has entered the vocabulary of many investors is SPAC, short for Special Purpose Acquisition Company. Yet, for some, what a SPAC exactly is and for what it is suitable, remains a mystery.

The definition and characters of a SPAC

I find it helpful to understand SPACs by breaking them down into bullet points:

• SPACs are shell companies with no business operations to speak of that are listed on stock exchanges.
• SPACs are usually sponsored by high-profile financial managers, such as former fortune500 CEOs and investment bankers.
• The purpose of a SPAC is to raise capital via its Initial Public Offering (IPO), which is then used to acquire (or merge with) an unlisted company.
• SPACs have two years from when they IPO to complete an acquisition or merger.
• A SPAC’s shareholders have to vote in favour of a proposed acquisition before it is finalised. After the merger of the two companies, the new entity is considered de-SPAC-ed

What are SPACs advantages?

The advantages SPAC’s provide are twofold. One advantage is for the SPAC sponsor, and the other is for the owners of the unlisted companies with which the SPAC mergers.

• Regarding the SPAC sponsor, their advantage is the significant stake they acquire in the SPAC (typically 20%) and the right to purchase more shares at a set price in the future (known as warrants).
• The appeal for unlisted companies to list on a stock exchange via a SPAC merger is its ease compared to a traditional IPO route. By merging with a SPAC, an unlisted company can forgo the lengthy and intrusive examinations and paperwork typically required to IPO.

Understanding how popular SPACs are in 2021

Since emerging in the 1990s, SPACs have primarily remained a fringe financial product. That is, until last year when their popularity exploded in the US.

In 2020, SPACs raised more than US $82 billion. Not to be outdone, 2021 eclipsed this value by April and has since gone on to raise more than US $120 billion. In contrast, SPACs raised a comparatively tiny US $13.6 billion in 2019.

According to Skadden, the rise in SPACs is due to recently enhanced investor protections and famous financial figures associating themselves with the investment vehicle. Names that have been associated with SPACs in the past couple of years include Bill Gates and Richard Branson, as either SPAC sponsors (Branson) or stakeholders in companies that have merged with a SPAC (Gates).