SPACs

Special purpose acquisition companies, known as SPACs, are those that have been created with the sole intention of raising capital through an IPO. They have no commercial operations and don’t communicate their intentions for the capital raised. With the Economist calling out the recent SPAC boom, there are rumours and questions circulating around this unique tradable asset.

In this article, we’ll give an overview of SPACs for dummies, including what they are, how they work, and how to invest in the UK. This guide will reveal the pros and cons of SPACs and examples to watch in the next few years.

What Is A SPAC?

A SPAC is a company with no financial or trading operation that has been set up to raise investment through an IPO (initial public offering). They are designed to enable companies who want to be listed on the stock exchange to do so quickly and easily. The listed SPAC will use the capital raised to merge with an existing company. Often, the SPAC won’t have a company in mind that it is planning to acquire, but if they do, they’ll often keep this a secret to prevent any impact on the value of the acquisition. For this reason, SPACs are known as ‘blank cheque companies’ – meaning those that invest are not always clear what they’ll be getting.

The money raised by a SPAC must be used to finance an acquisition of a company or it will be liquidated. If a SPAC hasn’t made enough money through its initial offering, it can create further revenue through PIPE deals until it has enough to acquire its target. Essentially, the SPAC provides companies with an easy route onto the stock exchange. Therefore, vs a traditional IPO, SPACs are increasingly becoming the preferred route for companies going public.

SPACs are usually backed by top investment banking and private equity firms, such as Goldman Sachs and listed on stock markets such as the New York Stock Exchange (NYSE), NASDAQ, AIM or the London Stock Exchange (LSE).

SPACs are available as stocks with brokers such as Trading 212 or Hargreaves Lansdown. Most SPACs will declare the sector they’ll invest in, such as real estate, biotech or retail, but will not divulge the company they intend to acquire until they are merging soon.

SPACs Vs IPOs

Arguably, the IPO process is long-winded. Critics have bemoaned the overly rigorous processes and high fees. But importantly for the acquisition companies, IPOs are also uncertain. A company’s valuation isn’t confirmed until its listed, whereas a merging company knows how much it will sell for.

Plus, for investors, the returns can be generous. Entering a blank cheque deal is risky, so early adopters may get the right to buy shares in the future at a low price (known as warrants).

History Of SPACs

It’s fair to say that we’re currently in a SPACs market boom. The trend which began in 2020 and having started in the US, is now spreading in Europe with the Netherlands as the preferred stock exchange above London. According to Bloomberg, the money raised by SPACs in the past year has surged to over $120m. And retail investors have been jumping on the bandwagon, accounting for 46% of Bank of America’s SPAC trading in January 2021.

But SPACs haven’t always been so popular, they used to be a way of taking companies public which may not have raised much capital through the traditional route. But this all changed when a couple of SPACs made some very high-profile profits. The SPAC shot to fame and the boom began.

Pros Of SPACs

Lucrative

The SPAC that caused the hype involved Richard Branson’s Virgin Galactic and a VC (venture capital) expert named Chamath Palihapitiya. When Palihapitiya’s SPAC worth $675 million (plus another $100m in other investment) merged with Virgin Galatic, the company went public at a valuation of $2.2 bn. 12 months later, it was worth $12bn. It was this success that has driven the growth of SPACs as an investment vehicle. Clearly, the gains can be huge if you’re part of a SPAC with the right strategy in mind.

Warrants

Stock warrants are securities that give the owner the right to purchase stocks at a specific price on a specific date. If the price is below market value, it can be a lucrative position to hold. Warrants are often given to early SPAC investors as a reward for their risky investment.

Share Price Increases

When mergers and acquisitions (M&A) are successful, very often investment will pile in and cause the share price to rise, resulting in profits for SPAC investors.

Cons Of SPACs

Critics Are Skeptical

A SPAC’s allure is based on the idea that it is an easier and more cost-effective route to IPO. However, some critics state that underwriting fees still occur and that benefits have been overstated. For retail investors, this is a risk because if popularity in the SPAC wanes, the SPAC may return to a vehicle which is used primarily for taking dodgy companies public.

Investment Potential

A study by Stamford University found that SPACs may not be as profitable vs direct listing in the long run. On average, companies that went public via the SPAC route fell in value by one third after 12 months of being listed. However, this was not the case for ‘high quality’ SPACs (Fortune 500 companies set up by private-equity firms), which outperformed the market on average over 12 months.

Failed SPACs

SPACs that have failed and gone into liquidity by not merging within the time period are still subject to set up and search expenses, which may be at the burden of the investors to cover. This could cause management to panic and acquire any company available if they are nearing the deadline. However, there has been no evidence this has happened so far.

SPACs Over NAV

A SPACs Net Asset Value (NAV) at IPO is usually $10. Those trading significantly over NAV come with downside risks that retail investors may not be aware of. Traders will look for SPACs that are close to NAV or trading below $10 and run by reputable management as these tend to be safer investments. These are the SPACs with the most potential as it could be an indication they’re undervalued.

Top 5 SPACs For 2021

If you’re wondering, ‘which SPACs can I invest in?’ we’ve compiled a list of SPACs that are going public or merging in 2021 with investment potential.

1. Pershing Square Tontine Holdings (PSTH)

Hedge funds legend Bill Ackman runs the Pershing Square Tontine SPAC that has caused much online speculation. As one of the big players in the industry, this fits the bill of a well-managed SPAC. However, it has recently been trading at nearly $30 per unit, far away from the golden $10 many SPACs hunters look for. Despite this, it’s definitely one of the top 3 SPACs to watch.

2. Stable Road Acquisition Corp (SRAC)

Following on from the success of the Virgin Galactic, for those who want to stay in the space transportation scene, Stable Road is a SPAC to watch in 2021. In October 2020, the news that SRAC is about to merge with Momentus Inc, a commercial space company that has previous dealings with Elon Musk’s SpaceX and NASA, was announced. The most recent stock list puts the valuation at around $15 following a steep drop in February. Nevertheless, this is one to keep an eye on.

3. Social Capital Hedosophia Holdings Corp (IPOD)

IPOD is the most recent SPAC holding from Charmath Palihapitya, the owner of the Virgin Galatic SPAC which caused the security to shoot to fame. This SPAC is still looking for targets to merge with and is currently trading at around $12 per unit. This is an interesting opportunity for those looking for budget friendly SPACs with strong management at the helm.

4. GS Acquisition Holdings II (GSAH)

As one of the 7 SPACs to play the rise of Bitcoin, this holding from Goldman Sachs is one to watch. There was speculation around a potential merge with eToro, the cryptocurrency exchange platform. Goldman has expressed interest in the cryptocurrency market in general. In March 2020, around the emergence of the COVID-19 pandemic, stocks were down to under $5. However, since then it has recovered, with units around $12.

5. Lefteris Acquisition Corp (LFTR)

This is another SPAC to watch for those interested in the cryptocurrency boom. Lefteris has confirmed that their acquisition will be in the Fintech space. The SPAC’s management team have a wealth of experience with cryptos (Asiff Hirji was previously the Coinbase COO), so there has been much speculation around its intended acquisition playing in the industry.

SPACs ETFs

With the rise of SPACs, another interesting security for investors are SPAC ETFs. The options on the market are threefold: passive index tracker ETFs, active SPACs-only ETFs or active SPACs post-merger mixes. Currently, it’s slim pickings with SPACs ETF, with only a select few on the market. But with the boom in popularity, this could change over the next few years.

The Future Of SPACs In The UK

In the UK in the wake of Brexit, the government is looking at loosing regulation on SPACs so that it can attract more of the business that has boomed over the past year. In general, the UK has missed out on a slice of the pie as many SPACs were listed in Europe. This loosening of restrictions suggests that key players in the business think SPACs are here to stay.

As the SPAC market grows, a number of ESG SPACs are emerging, creating interesting investment opportunity for retail investors with sustainability at the core of their portfolio.

Final Word On SPACs

Now that we’ve explained SPACs, you can comfortably trade them via broker a which allows stock trading.

Critics highlight the SPAC boom could become a bubble or even a crash. However, there’s little evidence to suggest this is what is currently happening. On the positives, investing in SPACs could be lucrative for retail investors who are rewarded for their faith in experienced investment managers.

Across the internet there are websites with SPAC lists offering the top 5 SPACs that you can invest in by size and sector, but it’s important you do your own research before you buy. There’s plenty of SPAC data online to give you the detail you need, but by definition, SPACs are uncertain and that could mean risk for retail investors.

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