A SPAC is a Special Purpose Acquisition Company, a listed vehicle which contains nothing but cash, but is listed on a stock exchange with the mission to acquire one or more private companies. We are now living in an era where there is an increasing number of private technology and clean energy companies which could benefit from further injection of capital, but are faced with the lengthy and costly process involved in an IPO if they want to go to the market.
A SPAC is a pure cash vehicle which can list ahead of acquiring such companies. They are becoming more popular with both investors and CEOs, who can see their benefit in facilitating a reverse listing of a company. They garnered headlines in the US recently when a SPAC called VectoIQ Acquisition Corp helped the Nikola Motor Corp to list on NASDAQ.
US hedge fund manager Bill Ackman of Pershing Square has illustrated the popularity of SPACs by raising more than $3bn in order to target a portfolio of possible technology acquisitions.
Fast asset value growth coming from tech, clean energy
Investors are now aware that some of the fastest asset value growth available in the current market comes from the technology and alternative energy sectors. A SPAC gives private companies a cheap and efficient way to get onto the public markets without the expensive IPO process.
SPACs have been particularly active in the electric vehicle market. We have already seen how Nikola Motor used a SPAC to list, but other vehicle manufacturers like Lordstown Motors (NASDAQ:RIDE) and Fisker Inc are coming to the market this summer via SPACs. This process is not restricted to the motor vehicle market either – Shift Technologies, an online used car marketplace and Velodyne Lidar have also used SPACs to get onto the stock market quickly.
“We are at a unique point in time when there is now considerable interest in the way technology is going to shape our future, especially in the energy space,” says Clive de Larrabeiti, founder of Pineapple Power. “Investors understand that, as with Internet ventures in the 1990s, the next couple of years is going to be defined by activity in the clean energy market. SPACs are a fast track for many companies in this space to get onto the market without the delays associated with an IPO.”
Intelligence released by law firm Proskauer has illustrated that 2020 has seen a sharp uptick in the number of SPACs coming to the market. Proskauer has been tracking SPACs since 2016 and has closely examined the deal terms of about half the SPACs which came to the market in the US alone during that period.
“The SPAC IPO market has been resurgent in recent years and has continued to accelerate through the summer of 2020,” explains Daniel Forman, partner with the Proskauer Capital Markets Group. “SPACs have gained a foothold as a preferred vehicle for private companies to enter the public markets in these volatile times.”
Investors are going to see more SPACs coming to the market over the next few months. For example, RedBall Acquisition Corp is looking to raise $500m – it is co-chaired by Bill Beane of Moneyball fame and Gerald Cardinale, a former Goldman Sachs banker. Beane came to fame as the general manager of baseball franchise, the Oakland Athletics. Like other SPACs, RedBall is not disclosing its target companies in advance.
In the UK, Hugh Osmond, the entrepreneur who was responsible for the runaway success of PizzaExpress, is known to be planning the listing of a $400m SPAC (also called a cash shell in the UK). Osmond, who is part of private equity firm Sun Capital Partners, is planning to list this SPAC in New York, but the target is believed to be a company in the UK.
But what is a SPAC really?
SPACs are listed on an exchange like a normal company, but unlike conventional companies, they just consist of investor cash. Typically, 100% of gross proceeds are held in trust. The sponsor of the SPAC will typically subscribe to founder securities and purchase additional warrants to ensure they have skin in the game.
The period during which a SPAC or cash shell needs to find and complete and acquisition will vary – typically this is around 24 months, according to the London Stock Exchange. Much depends on whether a SPAC already has a target in mind.
Once an acquisition is made, the SPAC will usually change its name and its listing code. From that time forwards, the company is no longer being treated as a cash shell, but will be valued according to the underlying business.