What is a SPAC and Why are They Suddenly so Popular?

Total SPAC investment nearly doubled from $83 billion in 2020 to over $160 billion in 2021, and it seems like they’re in the headlines every day.

“The single best risk-adjusted investment you can make.”

That may seem like a bold statement, but Dr. David Panton of Navigation Capital Partners gave us good reason to believe it in our recent webinar on SPACs, or special purpose acquisition companies, hosted by Excelsior’s founder, Brian Adams.
In this conversation they discussed the following:

● What defines a SPAC
● The history of SPACs
● The regulations around SPACs
● The recent surge in popularity of SPACs
● Advantages of SPACs compared to typical IPOs or private equity
● The investor journey in a SPAC deal
● Ways to invest in a SPAC

So, what exactly is a SPAC?

Dr. Panton gave listeners a simple definition to begin with: “a SPAC is a company that has a special purpose to complete an acquisition.” This definition has extended, however, to also include mergers. SPACs are listed and publicly traded, but they don’t hold any operating assets. Rather, they raise cash into their company, have a set time period to find another company to acquire/merge with, then take that private company public.

“It’s also important to note that SPACs cannot know of the company they’re going to acquire ahead of time.” Additionally, the acquired company must be worth at least 80% of the cash raised in the SPAC IPO.

What is the history of SPACs?

SPACs were created by David Nussbaum in 1993, a time when blank check companies were prohibited in the US. Dr. Panton explained that “these were born as an exemption of listing blank check companies.” Since the 90’s, over 700 SPACs have been listed, raising hundreds of billions of dollars. While the raises used to be relatively small, typically at less than $100 million, they’ve become much more established today with an average raise of about $380 million.

How are SPACs regulated?

Because regulations used to be so low, “SPACs were somewhat abused in the past.” But the SEC has made many changes, leading to an increase in the quantity of SPACs launched as well as an increase in the quality of their participants. For example, just five years ago, Goldman Sachs had a strict policy against SPACs, but they’re now the first gold-bracket investment banking firm to have sponsored two of their own.

In addition, the New York Stock Exchange did not list any SPACs until just three years ago, launching their first in May 2017. But since then, the NYSE has listed more than 60 SPACs, and they are now the top in terms of listing by volume for 2020.

Why are SPACs suddenly gaining so much popularity?

“While SPACs used to be outside of the mainstream, they’re now straight down the fairway.” But why? Dr. Panton shared three main factors influencing the recent surge in popularity of SPACs:

1. Supply and demand: The number of public companies has gone down dramatically over the last 20-30 years, dropping from 8,000 to just over 4,000 today, but the amount of money flowing into the public markets has simultaneously been increasing. Because the stock exchanges make their money by bringing on new companies, they’ve pushed to bring more SPACs into the market.

2. The private equity market: There has been a huge increase in the amount of capital invested in private equity (over $2 trillion today), but the number of exits has seen a decline. Private equity-backed portfolios are always looking for opportunities to exit and make a return, so they are supportive of the SPAC model.

3. SEC regulations: The SEC has become more involved in regulating SPACs, which has proven to boost their reputation in the investment world. They have stepped in to set a fixed price for each IPO, as well as regulate voting and redemption rights to the benefit of all parties involved.

What are the advantages of SPACs?

Dr. Panton shared some compelling reasons why a company may want to participate in a SPAC deal rather than taking private equity investment or going public with a traditional IPO.

• Valuation: Public companies trade at higher multiples than private companies, so SPACs offer an opportunity for higher valuation.
• Control: While business owners lose some control when taking on private equity, SPACs allow you to maintain a significant stake in the company.
• Liquidity: SPACs offer security in liquidity through the cash raised in the IPO.
• Time: Traditional IPOs can take up to 2-3 years to finalize, but SPACs are typically completed in 2-3 months.
• Cost: Unlike traditional IPOs that are very expensive to execute, SPACs typically pay for most of the costs, saving a significant amount of money for the company.
• Certainty: SPAC deals are identified ahead of time, and the valuation is agreed upon by both parties. Rather than “hoping the window is open,” you can be certain that the transaction will occur and that it’ll be for a value you are on board with.

What does the investor journey look like in a SPAC deal?

For starters, when a sponsor group takes a company public in a SPAC, they offer units, not shares. These units include shares, warrants, and sometimes certain rights, and they all go public at $10 per unit. But there is one unique feature that really sets SPACs apart from typical investment deals: you have the opportunity to get your money back.

When you invest in the IPO, the money is put into a trust account that’s managed separately while the sponsor of the SPAC looks for another company to acquire/merge with. When that company is chosen and announced, investors have the right to get their money back if they’re skeptical of the success of the deal. According to Dr. Panton, this is the #1 factor that makes SPACs the “absolute best investment to be in.”

What kinds of SPAC investment opportunities exist?

There are three different ways to participate in a SPAC, depending on your investment level.

1. Sponsor Group: “Typically SPACs are sponsored by senior investors who have a track record of buying or running companies.” Sponsors take on more risk since investors have the right to take their money back after the deal is announced, but the potential for return for sponsors is extremely high, with most deals resulting in over 6x cash on cash returns.
2. SPAC IPO: Investing directly into a SPAC IPO is a great opportunity for retail investors, especially considering the advantage of being able to get their money back. Robinhood, a simple online investing platform popular among retail investors, has even begun to offer SPAC IPOs, widening the opportunities for SPAC investment.
3. PIPE: After identifying their target company, most SPAC sponsors raise money through a PIPE, or private investment in public equity, to provide insurance on the capital raised previously in the IPO. This opportunity exists for institutional investors like hedge funds.

So, are SPACs just a fad with an ending near in sight? Dr. Panton certainly doesn’t think so, and would actually argue that “we’re only in the beginning.” He reminded listeners that years ago, private equity was also believed to be a trend that would fade away, and we all know that has not been the case. There are over 8,000 private equity based companies in existence today, many of which are or will be in need of exit opportunities, and SPACs serve as a great mechanism for this, solving problems for both the companies and the investment firms.

If you are interested in SPAC investment opportunities, Navigation Capital Partners has a SPAC Operations Group that has been operating under the direction of Dr. David Panton for the past three years. We’d be happy to make an introduction to Dr. Panton and his team because, as he concluded the webinar with, “SPACs are here, and they’re here to stay.”