Special Purpose Acquisition Companies: What Directors Should Know and Why: "Blank check" investing tripled in 2020.

AuthorAnani, Karim
PositionSPACS

The use of special purpose acquisition companies (SPACs) has become an increasingly popular route to the public markets, and there appears to be no sign this will slow down. In 2020, SPACs netted record-breaking IPO proceeds of over $50 billion, and the more than 60 completed and announced SPAC mergers dwarfed the 21 and 22 seen in 2018 and 2019, respectively, based on public filings and assumed transaction sizes. If this trend continues, active and filed SPACs could result in more than 200 new public companies worth over $300 billion.

Numbers of this magnitude demonstrate that SPACs have been gaining favor with private companies that want to go public as well as with prospective investors. Private board directors must understand the ins and outs of this strategic option if they're serving a private company exploring this path. Public directors should be similarly prepared if they're approached to join the board of a SPAC.

The role of a SPAC

Sometimes referred to as "blank check companies," SPACs are investment vehicles that raise capital from investors via an IPO to use at a later date in an acquisition of a target that is still undetermined as of the listing. Investors in SPACs are essentially backing sponsors with the belief that they'll be able to effectively deploy the capital in an attractive asset that will provide a good return.

Functionally, SPACs serve as a temporary cashbox used to identify a merger target and facilitate its access to public markets. Proceeds from a SPAC listing are typically set aside in an escrow account until a target is identified, at which time investors can either approve the transaction or receive their money back plus pro rata interest in the trust account if they participated in the IPO. Sponsors typically have 18 to 24 months to identify a suitable investment.

That defined time frame is one reason why SPACs have attracted interest from a wide range of players, including hedge funds, private equity (PE) and retail investors. Another factor is the typical $10 share price, which avoids the seemingly inevitable IPO "pop" of an undervalued stock. More importantly, players appreciate the ability to generate returns and liquid currency in the form of stock faster than the normal holding period of PE or hedge funds. In addition, PE investors are able to generate gains via founder shares, and retail investors have the chance to invest earlier in companies that previously would have followed the private equity...

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