SPACs: the New IPO

A review of last year’s SPAC activity is startling proof that SPACs are here to stay. There were 248 SPACs registered in 2020, compared with 59 the prior year, and the average raise was a robust $336Million.

(For those not familiar, a SPAC is a public US company with cash and no business, and its role is to acquire a privately held business and thus make that private company public; it replaces the IPO process for a private company obtaining operating cash by sale of shares.)

With thanks to KPMG for an excellent webinar today, here are some highlights:

SPACs are becoming popular with institutional and wealth management investors because the are a liquid short-term play with an option for future growth. When investors buy SPAC shares they are SEC-registered and can be sold at any time, or sold or redeemed once a target acquisition is identified if the investors do not like the deal, or at any time after the acquisition closes.

In fact, SPACs are so attractive that sponsors these days are often themselves institutional investors including PE and hedge funds.

During 2020, target companies often were very robust and successful private enterprises in a wide variety of industries. Owners of these acquired companies receive shares of the SPAC which are saleable and can also receive cash in the deal. To be acquired in this fashion, a private company needs to have financial audits and take other steps required to become public by an IPO process.

SPACs can hold investor cash for two years but if they fail to make an acquisition in that time they must refund the investments made in the SPAC. Over the last seven years, fully 95% of all SPACs have been successful in completing a deal within the two years.

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