One of the hottest trends on the financial markets is formation of a special purpose acquisition company (SPAC). Companies wanting to undergo listing may choose to divert from the traditional IPO route and associate themselves with the SPACs. But what are these SPACs and how do they function?
1)
Essentially,
SPAC is a shell company, established with a sole objective to raise funds from
the retail investors through an IPO, only to make an acquisition into the
future. Thus, a SPAC is sponsored by institutional investors, private equity,
hedge funds, CEOs and high net-worth individuals
2)
The
private companies chose SPAC route for listing since the process ensures access
to faster liquidity which otherwise may be denied. Besides IPO takes 1-2 years
to complete. SPAC offers faster listing with process completion in
approximately 5-6 months.
3)
As per data from Dealogic, the US SPAC IPOs
have grown exponential from USD 13.2 billion in 2016 to USD 34.6 billion in
2020, registering a CAGR of 26.8%. Especially in the times of COVID, with a heightened
need for faster liquidity, year 2020 has shown a rapid surge of 182% Y-O-Y in
SPAC deals.
4)
This
trend is slowly moving towards European markets as many US SPACs are focusing
on acquiring potential targets in the region. This paves way for private companies
with attractive valuations which are now looking to list themselves on the US
stock exchanges.
5)
Furthermore,
a red ocean is bubbling in the US markets with SPACs fighting hard to get to these
lucrative deals. This has led to some newly formed SPACs to look beyond
national frontiers into the niche markets. The Asia Pacific region is also
emerging as a hot bed for SPACs with USD 2.4 billion raised in 2020 as against USD
613 million in 2019.
6)
However,
there is a rising concern amongst the investor lobby that this bubble will eventually
burst in the future. One of evident red flags is the fact that the SPACs need
to hunt their potential targets within 24 months, failing to do so, will result
in entire investment being returned to investors with interest. With deadlines
approaching, SPACs may compromise over quality targets and simply acquire unfavored
companies to avoid liquidation. Another measure cause of worry is that SPACs do
not have a robust business plan conveying their way forward, resulting in
strong ambiguity amongst the investors.
In my opinion, with too many investors fighting for a limited share of pie, it is clear that there will be a correction in the future. It is just the question of when.
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