SPAC 101: What the heck are SPACs and why do you need to be aware of them?
The 90’s introduced us to SPACs (Special Purpose Acquisition Companies). This was a new method to take private companies public.
Also known as ‘blank-check companies’ SPACs are primarily publicly traded companies—they have no commercial operations, make no products and have no sales. SPACs are established for the sole purpose of raising money through an IPO to use for acquiring another company. They act as the financial middleman between the private and public markets.
This trend reemerged in 2003, 2007, and finally in 2014 with private equity firms becoming frequent SPACs sponsors. But it was in 2020, the year of the pandemic, when SPACs really became a hot trend.
SPAC IPOs raised a total of $82 billion in 2020. And the hot trend continues! 202 SPACs have raised over $63.5 billion on public markets through the first two months of 2021 according to Nasdaq.
Stock market investors need to make sure they jump on the bandwagon. Fast.
Recently, I started a community of leading senior women executives where we discussed the pros and cons of SPACs. The group discussed their firsthand experiences of being involved in a SPAC transaction.
Some of the advantages that came to light include:
– Compared to traditional IPOs this saves massive amounts of time.
– It takes less capital to do a SPAC rather than a buyout or a traditional IPO
– There is less governance involved than taking a company public.
– SPACs offer certainty on price early in the process with limited risk from a fluctuating market.
However, just as there are two sides to every coin, there are a few cons to consider before you decide to take the SPAC route:
– It might be riskier for late and long-term investors. Later investors in a company that utilizes a SPAC have a lot more risk.
– Companies may not always receive the thorough due diligence a traditional IPO has to offer.
– The Boards for SPAC companies are overwhelmingly men – women hold only 15.5% of the total seats (source: Bloomberg https://www.bloomberg.com/news/articles/2020-12-04/in-record-breaking-year-spacs-avoid-gender-diversity-push)
– D&O insurance is tripling rates due to influx of SPACs
With the volume of SPACs underway, we will need to keep an eye on how many of them will be successful. Do your research. There are many companies out there attempting a SPAC transaction when they should not be doing so. First the company has to be IPO ready. Second, they need the right management team and a good, diverse board that knows how to run a business and, finally, financial experts who know how to manage a SPAC process. Meeting these three conditions gives you the highest probability of success.
Stay tuned for more insights on this and other hot topics facing leadership teams today.