Special Purpose Acquisition Company: Here’s What You Need to Know

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The concept of using a Special Purpose Acquisition Company (SPAC) as a deal-making vehicle has been very hot in 2020. It’s popularity seems to be heading into this year as well! Essentially, this is a popularized approach to doing deals and raising capital. Are you using it? Should you be? Listen in to find out more!

What is a Special Purpose Acquisition Company?

A SPAC is a public company that has no operations whatsoever.

Essentially, a Special Purpose Acquisition Company raises money for the sole purpose of acquiring a company, or multiple companies, at some point in the future. When fundraising starts, no one knows what company is going to actually be acquired. The founder and promoters who put the SPAC together may have a target idea, but also may not. (Sometimes thought of as “blank check” companies because investors don’t know where their money will end up!)

Why would anyone take the risk? Well, it probably helps that Special Purpose Acquisition Companies raised 78 billion in the US in 2020. 45% of all companies that went public were classified as SPAC. This exceeds the former SPAC output from all former years combined! The industry is seeing massive growth, which seems to be a continuing trend.

SPAC Fundamentals

Most investors investing in private offerings (venture capital, angel investors, etc) will say that one of the biggest things they are investing in is management. Now, they do get to vet the company and get a fuller pitch, of course. But ultimately, they do understand that growth and change tend to go hand in hand.

Even though they know the company, management is key. With a SPAC, you know the owners/founders, and your investment is a vote of confidence in their ability to make the right acquisition decisions when the time comes.

Pre-acquisition, the SPAC usually has about two years to make an investment. If no investment is made, the money is typically paid back to investors with interest. (Each individual Special Purpose Acquisition Company has its own contract and legal language, of course, but this is what is typical in the industry.) This minimizes risk of loss, since if there is no company acquired you have at least earned interest. (There may be an opportunity cost since your money has been tied up, of course.)

Ideally, of course, you invest in a SPAC because you want them to make an acquisition. This is where your greatest reward, as well as your greatest risk, lie.

Risks, Rewards, and Special Purpose Acquisition Companies

Will the promoters of the SPAC make an acquisition? And will that acquisition be profitable? Because of their huge surge in popularity, the answers to both those questions might be a resounding YES.

Here are some reasons why SPACs are working so well right now.

  1. Investors are looking for higher returns. In the past, this is money that might have ended up in hedge funds. However, hedge funds aren’t performing as well as they have. Many investors are looking for other ways to leverage growth. SPACs offer that, and many investors are all too happy to take advantage! (Because of their success, competition is rising and we’ll start to see a bit of a squeeze on this.)
  2. There are a lot of big names in SPACs. Citi Group, Goldman Sachs, and other easily recognized names are heavily involved in Special Purpose Acquisition Companies. This has probably helped to increase their legitimacy and popularity. Evaluations are strong as well, so more money can be raised. If the market starts to cool, SPACs will likely become less popular. Rising interest rates might also make safer investments more attractive once again.
  3. Being acquired by a SPAC helps companies “skip” a step. Many companies that are looking to raise that last round of capital find SPAC acquisition very helpful. Going public solo as an operating company is highly complex. However, a SPAC is already public, and by getting acquired by them a company can go public without filing for their own IPO. This can be really helpful and speed things up.

The Future of SPACs

Special Purpose Acquisition Companies are “hot” right now. The level of volume is unprecedented, as noted above. Major players are being attracted to them as vehicles for capital raising.

This might continue into the long term. Or it might be a signal that the market is getting overheated, and we could see SPAC start to fade. The majority of SPAC acquired companies from 2015 and 2016 aren’t yet making money. That’s 4-5 years without bringing in a profit! Depending on industry, turn around times, and technology needs, that may not be a problem. However, it might also be a cautionary sign.

Smaller investors, or those with fewer investable assets, are likely not going to have SPAC access soon.

For the right people, however, a Special Purpose Acquisition Company is a vehicle worth checking out. Investing in one is an investment in the founder’s ability to acquire worthwhile companies. Moving forward in 2021, we’ll be monitoring the success of those unprecedented 2020 SPAC volumes. If we see huge changes, I’ll do my best to keep you updated. I’ll definitely be following along myself!

Listen in to learn more!

Corey Kupfer is an expert strategist, deal-maker, and business consultant with more than 35 years of professional negotiating experience as a successful entrepreneur and attorney.

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