Cash shells, also known as SPACs (special purpose acquisition companies) are vehicles that are listed on the stock exchange with no assets other than cash. In most cases, they raise money with the objective of finding appropriate companies to invest in. This can be a quicker way to bring a previously private company to the public markets than an IPO.
The success of a transaction involving a cash shell or SPAC is not dependent on raising money once an acquisition target is identified.
We are currently seeing cash shells being used to make acquisitions in potential fast growth technology companies and those firms positioned to benefit from growing demand for renewable energy infrastructure.
Subscribe for more stories like this, 8am weekdays - for free!
Hedge fund manager Bill Ackman last month announced that he was raising money for a $3 billion SPAC – Pershing Square Tontine Holdings – which, if it lists, will be the largest ever such vehicle listed. Ackman says he will be using the company to target late stage venture-backed technology companies, so-called ‘unicorns’, in an effort to bring them onto the public market.
In the case of Nikola Motor Company (NASDAQ:NKLA), the hydrogen-powered truck manufacturer listed via a reverse takeover using a listed cash shell, VectorIQ, the SPAC provided Nikola Motor Corp with a fast route onto the NASDAQ exchange.
Traditional IPOs can take months, even years, to come to the market, and if the past six months are any illustration, markets are frequently moving way too fast. The failure of WeWork to IPO earlier this year is a case study of what can go wrong with an IPO if it takes too much time to complete.
“We are living in a climate where there is intense interest in the technology and alternative energy sectors, but where many interesting companies within these sectors remain private,” says Clive de Larrabeiti, founder of Pineapple Power Corp. “Many of these companies want to grow but there are big obstacles when it comes to going through the long IPO process. Cash shells bring the opportunity for these companies to get to the market and grow more quickly.”
Cash shells and reverse takeovers
Cash shells and SPACs are able to move quickly to initiative a reverse takeover, buying a private company and bringing it onto the market. In the case of Nikola Motor Corp, there was no lengthy pre-IPO process, as VectorIQ was already listed on NASDAQ.
Typically, once a deal has been agreed, a readmission document is prepared for the new entity without the need to go through the formal admission process required by an IPO.
Cash shells are a great way for new technology companies to come to the market, as Ackman has recognised. Many companies operating in the alternative energy space have been backed by venture capital and have grown to the point where they are already quite large, but still unable to access the additional pools of investor support that exist on the stock market.
Untapped potential in the green energy sector
According to data from Novethic in France, some €57 billion is invested in what are called unlisted green funds – e.g. private equity and infrastructure funds that are closed ended, and which historically have been among the biggest backers of alternative energy technology companies. More than half of the unlisted green asset funds are focused on the renewable energy space, says Novethic.
“Many green energy companies are still sitting in private hands, but these are also companies that will be playing an important role in the future of the global economy if countries are to remain on track to meet their zero emissions goals,” adds de Larrabeiti at Pineapple Power. “They will need access to public investment to achieve future growth ambitions.”
The cash proceeds from a cash shell listing are usually ring-fenced in a trust account that can only be used for the purposes of an acquisition under the terms of the shell. The SPAC may draw on some funds to pay for limited day to day expenses required for its own operation.
SPACs generally operate on a limited time frame and need to make an acquisition within that time frame, unless the shareholders grant an extension.