The rise of SPACs, the new IPO!

Weathering the instability and volatility in the financial markets, Special Purpose Acquisition Companies ("SPACs") have raised a whopping USD 83 bn in 2020, representing ~65% of the aggregate funding in the whole of last decade!

So what is a SPAC?

• SPAC is a blank check company with no commercial operations.
• It is a publicly listed acquisition vehicle, wherein, a sponsor team raises a blind pool of cash for effecting a merger, share exchange, asset acquisition, or similar business combination with one or more businesses.
• The key stakeholders of a SPAC are : -  sponsors (who float the SPAC); investors (institutional, and retail) target entity (entity being acquired / merged). 
• A sponsor is highly incentivized to generate excess value through sourcing investment opportunities within a 24 month window.
• SPACs are primarily listed on the Nasdaq / NYSE.

Why SPACs and why now?

• Speed, stability and certainty are the key advantages of taking the SPAC route to go public. SPACs take a few months to go public vs a few years for a traditional IPO! Stability in fund raise and certainty in valuation also make it an attractive alternative.
• Though SPACs has been in existence for over a decade now, the recent volatility in the financial markets caused by the COVID-19 pandemic has resulted in 2020 SPAC boom!

What are the benefits of SPAC to its key stakeholders?

SPACs in the last decade

SPACs have raised an aggregate of USD 130 bn in the last decade

Fund raising process - SPACing and De-SPACing

SPAC process

Once SPAC entity is listed, sponsor typically has about 24 months to acquire / merge with another business. This process is called De-SPACing. The entity acquired is typically 3x – 4x of the SPAC size so as to minimize the effect of dilution and make the De-SPAC transaction more attractive to a target.

De-SPAC process

What next?

Considering the immense benefits of a SPAC to all its stakeholders and the current liquidity in the financial markets, the appetite for SPACs is expected to continue, at-least in the foreseeable future!